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Wells Fargo’s earnings hit by rising loan reserves and weak mortgage lending

July 15 – Wells Fargo & Co reported a 48% drop in quarterly profit on Friday as the bank set aside more cash to cover possible loan losses while its mortgage business came under pressure from rising interest rates.

The company set aside $580 million in loan losses in the second quarter, up from a release of $1.26 billion a year earlier, when aggressive monetary stimulus measures cushioned the blow from the pandemic and supported the economy.

Last quarter, the bank’s foreign exchange reserves helped offset a decline in its mortgage business. This quarter, rising interest rates have further dampened demand for home loans, causing a 53% drop from a year ago.

“We expect loan losses to rise from these incredibly low levels, but we have yet to see any significant deterioration in our consumer or commercial assets,” chief executive Charlie Scharf said in a statement.

Wells Fargo shares fell nearly 3% in premarket trading in New York.

The fourth-largest U.S. bank has faced sanctions from regulators since 2016 over management and oversight failures linked to a series of sales and other scandals.

Wells Fargo remains below the Federal Reserve’s $1.95 trillion asset limit, which has slowed the loan and deposit growth it needs to boost interest income and cover costs.

The fourth-largest U.S. lender posted a profit of $3.1 billion, or 74 cents a share, in the quarter ended June 30, compared with $6 billion, or $1.38 a share, a year earlier.

Analysts on average had expected earnings of 80 cents per share, according to estimates of IBES of Refinitive.

Wells Fargo’s average loan size increased to $926.6 billion, compared to $854.7 billion a year earlier. The profit of mortgages decreased by 53% from the previous year.

Overall, non-interest expenses fell to $12.9 billion from $13.3 billion a year earlier.

Wells Fargo’s total revenue fell to $17.03 billion from $20.3 billion a year earlier.

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