Wells Fargo’s lending stalls as customers avoid borrowing

Wells Fargo’s average loans tumbled in the second quarter as consumers and businesses, buoyed by pandemic stimulus programs, refrained from more borrowing.

The average balance of the bank’s lending book dropped 12% to $854.7 billion, according to a statement Wednesday. The result mirrored a similar decline at Bank of America, which said earlier that loans and leases in its consumer banking unit also fell 12%.

Unprecedented levels of U.S. government aid have left consumer and corporate balance sheets in healthy shape, meaning more loans aren’t a top priority. Executives across the industry have predicted a wave of spending will drive loan growth, but that hasn’t yet materialized.

Still, the company beat analysts’ expectations for revenue, expenses and net income, in a sign that CEO Charlie Scharf’s turnaround is taking hold. The firm also benefited from a $1.6 billion reserve release, $1.3 billion of which fell to the bottom line, boosting net income to $6 billion. Analysts had expected $4.4 billion.

“We believe we are doing what’s necessary to improve the underlying earnings power of the company,” Scharf said in the statement.“The headwinds of low interest rates and tepid loan demand remained.”

Shares of San Francisco-based Wells Fargo, which surged 43% this year through Tuesday, advanced 1.7% to $43.96 at 9:31 a.m. in New York.

Cost cuts

Scharf, who took over atop the nation’s fourth-largest lender almost two years ago, has embarked on a series of cost-cutting initiatives as part of his effort to boost profitability after years of scandals. Noninterest expenses dropped 8.3% to $13.3 billion in the second quarter, while analysts were expecting a 7.3% decline.

Headcount fell to 259,196 from 264,513 at the end of March. Wells Fargo began a series of layoffs last year after pressure to dramatically reduce costs came to a head when the firm reported a quarterly loss.

The bank is still under a costly Federal Reserve-imposed asset cap limiting its balance sheet to its size at the end of 2017. Earlier this year, Wells Fargo scored a sign of progress in its efforts to escape the penalty by securing the Fed’s acceptance of a proposal for overhauling risk management and governance. Period-end assets were $1.95 trillion, down from $1.97 trillion a year earlier.

Also in the second-quarter results:

  • Revenue surged 11% to $20.3 billion, beating analysts’ estimates of $17.8 billion.
  • Net interest income, a key source of revenue, sank 11% to $8.8 billion. Analysts were expecting a 10% drop.
  • The bank’s efficiency ratio, a measure of profitability, improved to 71% from 72% in the first quarter.

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