Putting further pressure on the San Francisco-based bank, the Bureau of Consumer Financial Protection imposed a $3.7 billion fine in December as a result of multiple legal violations over the past several years.
Regardless of these developments, the stock has posted a gain of nearly 10% over the past month.
Wells Fargo reports muted earnings amid a deteriorating economy
In early January, the bank announced dwindling profits for the fourth quarter, which were impacted by a settlement it had to make and the need to allocate more funds toward reserves given the economy’s decline.
Wells Fargo reported a significant decline in its quarterly net income, which fell 50% year over year to $2.86 billion, or 67 cents per share. The bank disclosed that lower mortgage banking activity and reduced loan originations were the key drivers behind the decline.
Revenue dropped 5.5% year over year to $19.66 billion and missed analysts’ forecasts.
Despite being expected to post around $1.46 in earnings per share, Wells Fargo was unable to do so due to operating losses of $3.3 billion caused by the impairment of equity securities, severance expenses and additional losses stemming from litigation, regulatory and customer remediation.
Wells Fargo’s net interest income was its saving grace, as 56% of its revenue is generated from the segment. As the company’s noninterest income dropped by 46%, the bank recorded a net interest income surge of 45% to $13.43 billion, primarily due to interest rate hikes.
For full fiscal 2022, Wells Fargo recorded $72.3 billion in revenue and $12.1 billion in net income, which were down 13% and 40% year over year. Due to lower revenue, the company’s profit margin dropped to 17% compared to 24% in 2021.
Wells Fargo’s earnings report was disheartening as the bank had previously declared it would pull out from the U.S. mortgage market. Furthermore, the company revealed last month that there would be a $2.8 billion after-tax operating loss connected to legal and compliance expenses.
Strategic shift
2022 was a challenging year for the mortgage industry due to rising rates, lower home sales and intense competition. Consequently, Wells Fargo decided to scale down its mortgage business and has announced layoffs.
According to a warning from the World Bank, we may be heading toward a global recession. This could result in a slowdown of home purchases and increased delinquencies, either of which can have a significant impact on businesses – particularly with extra costs to manage the loans.
Wells Fargo, which used to be the mortgage leader, is now moving away from the mortgage industry and focusing more on other aspects of its business.
The organization has shifted its focus from reaching out to all Americans to providing home loans for existing bank and wealth management customers and borrowers residing in minority communities.
Wells Fargo is shutting down its correspondent business of buying loans from third-party lenders as part of its restructuring process. It will also drastically reduce the size of its mortgage servicing portfolio by selling off assets.
In a statement, Kleber Santos, the consumer lending head, noted the decision to cut back on lending activities is because of two main factors – a dismal market due to the Federal Reserve’s rate hikes and doubts over the bank’s long-term revenue.
For CEO Charlie Scharf, it is the biggest strategic change since he joined Wells Fargo in 2019. U.S. households owe a huge debt, with mortgages making up over two-thirds of the $16.5 trillion balance. This is by far the biggest form of lending for American citizens. Before Scharf’s tenure, Wells Fargo was proud of its vast share in the home hoan market. As of 2019, this figure reached a whopping $201.8 billion, as per an Inside Mortgage Finance industry newsletter. It also made it the leading lender in the country at that time.
However, Wells Fargo’s withdrawal from the U.S. mortgage market makes sense as it faces increased scrutiny from regulators while interest rates soar. Moving away from the multitrillion-dollar market will relieve it of the pressure presented by both factors.
Solid shareholder returns are a saving grace
Despite a tumultuous 2022, Wells Fargo’s stock performance has remained resilient. Since the start of the year, the situation has not changed and the share price has remained in the black.
The biggest company-specific cause of Wells Fargo’s share price increase is its announcement of resuming buybacks during the current quarter. However, the bank has not specified the number of shares it intends to buy back in this instance.
In addition, Wells Fargo reported an encouraging decline in its estimates for possible legal losses, which dropped from $3.7 billion in the third quarter of 2022 to $1.4 billion at the year’s end, the lowest it has been since 2016. The forecasted potential financial losses associated with the bank include regulatory fines, ongoing litigation and reparation for past compliance issues.
Takeaway
2022 saw a huge dip in the global economy, and Wells Fargo was also affected by it, as evidenced by its earnings performance. The bank has released muted financials and declared it is scaling back its mortgage business. If a global economic downturn does occur, this could be an advantageous step for the company.
However, the strategic shift the company is taking is a massive one. It will take Wells Fargo a while to get all of its ducks in a row. Until that time, investors taking a long-term view will be happy with the stock, but the prospect of quick gains is unlikely.
This article first appeared on GuruFocus.
