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Wells Fargo in the red: bank posts first quarterly loss since 2008

Austin Weinstein, The Charlotte Observer on

Published in Business News

Wells Fargo posted a quarterly loss for the first time in over a decade on Tuesday as it set aside $8.4 billion in the second quarter to cover coming defaults on loans due to the coronavirus pandemic. The bank also cut its dividend to 10 cents per share from 51 cents per share.

The bank, the fourth-largest in the U.S., lost $2.4 billion in the second quarter, its first loss since 2008. That's down from a profit of $653 million in the first quarter. Lower interest meant net interest income was down $1.4 billion to $9.9 billion for the quarter, while more strength in the bank's trading and securities businesses led to an increase in non-interest income to $8 billion, up $1.6 billion.

Despite attempts from management to clamp down on expenses, non-interest expense shot up $1.5 billion in the second quarter to $14.6 billion. Bonus pay to frontline employees and other pandemic-related expenses helped drive expenses higher, offsetting declines in spending in areas like technology, travel, entertainment and advertising.

Shares fell roughly 7.3% to $23.56 in early trading. Chief Executive Officer Charlie Scharf said he was extremely disappointed in the results.

"While the negative impact of the pandemic is unprecedented and many of our business drivers were negatively impacted, our franchise should perform better, and we will make changes to improve our performance regardless of the operating environment," Scharf said in a statement.

Despite the loss, Scharf said that the bank's capital and liquidity are extremely strong.

The bank attributed the loss, the first of any major U.S. bank during the pandemic, in part to a worsening outlook on the length and depth of the current economic downturn.

Industries that were acutely hit by the pandemic, like the oil business and commercial real estate, drove much of the weakness in the bank's gigantic corporate lending book. 47% of the bank's past-due corporate loans were from the oil & gas industry alone in the second quarter. That industry makes up only 3% of the bank's outstanding commercial loans.

Coming cutbacks

The bank has now set aside $12.4 billion in the past two quarters to financially prepare for the scores of businesses and consumers who will default on their loans because of the economic effects of the coronavirus. Much of the financial carnage has been delayed by a mammoth federal stimulus program that pumped money into the pockets of consumers and businesses.

 

Of major U.S. banks, Wells Fargo has struggled the most with the impact of the coronavirus on the U.S. economy. Scharf, who started in October, was in the midst of planning a vast realignment of the bank when the virus hit. Before his arrival Wells Fargo had regularly lost ground in many of its lines of business to competitors JPMorgan Chase and Bank of America.

A growth cap imposed on the bank by the Federal Reserve as a result of its sales scandal didn't help, but Scharf has also criticized bloated expenses. He has considered reducing the size of the bank and exiting various lines of business. Much of that was temporarily sidelined when the pandemic hit.

In June, the bank's CFO, John Shrewsberry, said he expects jobs cuts to come this year. Wells Fargo employs vastly more people than its competitors, with a total headcount of 263,000. Bank of America, which is roughly similar in size, employs 208,000.

The bank employs 27,000 people in Charlotte, a result of its 2008 purchase of Wachovia. Wells Fargo also has the largest branch network of any American bank.

With the recent drop in profits, cutting costs becomes paramount if the bank is to return to profitability.

Early Tuesday, JPMorgan reported earnings that beat Wall Street's expectations, driven by strong trading revenues that offset the $10.5 billion it set aside to prepare for coming defaults. Charlotte-based Bank of America and Truist report earnings Thursday.

(c)2020 The Charlotte Observer (Charlotte, N.C.)

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