Wells Fargo's shares rise despite the bank's profits being cut in half by higher reserves and settlement costs

Wells Fargo Reported Lower Profits on Friday, Due To a Recent Settlement And the Need To Build Up Reserves Amid a Weakening Economy. The Stock Recovered From Earlier Losses To Trade 2% Higher In Friday’s Trading.

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The bank did well by increasing its assets and expanding its operations. It is now one of the largest banks in the world and is well-positioned to continue its growth.
Wells Fargo's net income fell 50% to $2.86 billion in the second quarter, down from $5.75 billion a year ago. The bank attributed the drop to lower mortgage banking revenues on fewer originations.

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In the latest period, the bank set aside $957 million for credit losses after reducing its provisions by $452 million a year ago. The provision included a $397 million increase in the allowance for credit losses reflecting loan growth and a less favorable economic environment, the bank said. The bank's provision for credit losses was higher than in the previous year due to loan growth and a less favorable economic environment.

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The earnings report was disappointing, coming after the bank announced earlier this week that it would be retrenching from the U.S. mortgage market. Meanwhile, last month Wells Fargo also said that it would have a $2.8 billion after-tax operating loss tied to legal and regulatory costs. Well Fargo's earnings were lowered by 70 cents per share due to the combined impact of the legal, regulatory, and customer remediation efforts.
Wells Fargo's earnings came in at 61 cents a share, missing analyst expectations of 66 cents a share. Excluding severance costs and a tax gain, the company's earnings were still below expectations.

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"Despite the significant impact of previously disclosed operating losses on our quarterly results, we are making progress in improving returns," CEO Charlie Scharf said in a statement. "Rising interest rates drove strong net interest income growth, credit losses have continued to increase slowly but credit quality remained strong, and we continue to make progress on our efficiency initiatives."

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As one of the six biggest U.S. banks, Wells Fargo is particularly reliant on mortgage sales and refinancing activity. However, this quarter the bank has seen a steep 57% drop in home lending revenue, due to rising mortgage rates.

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Wells Fargo's stock price fell by 14% in 2022, which was better than the overall performance of the S&P 500 index. The bank's retail and commercial banking businesses benefited from rising interest rates. So far this year, the stock price is up by 3.7%.

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Looking ahead, we are closely monitoring the effect of higher interest rates on our customers and anticipate that deposit balances and credit quality will gradually return to pre-pandemic levels,” Scharf said.