DealBook: Wells Fargo Meets Wall Street’s Profit Estimates

Photo A Wells Fargo branch in New York.Credit Shannon Stapleton/Reuters

Wells Fargo's second quarter results met Wall Street expectations in the second quarter, as credit quality improved and the bank tightened expenses.

The earnings per share $1.01, announced Friday morning, matched analyst's estimates, as surveyed by Bloomberg.

Wells said its profits rose 4 percent from the same period a year ago, to $5.7 billion. The bank's second quarter revenue fell to $21.1 billion from $21.4 billion a year ago, as total loans declined slightly.

As the first large bank to report its second quarter results, Wells Fargo will serve as the bellwether for consumer lending in the banking industry.

"Our results also reflected strong credit quality driven by an improved economy, especially the housing market, and our continued risk discipline,'' the bank's chief executive, John Stumpf, said in a news release.

In recent quarters, analysts and investors have been heartened by Wells' ability to grow its loan portfolio, despite the tepid economy and slew of new consumer regulations. But they have been watching closely for signs of whether Wells is loosening its credit standards, as it searches for new business.

Wells avoided many of the crippling mortgage losses suffered by many large banks during the financial crisis, but its aggressive push into areas like auto lending show the bank's willingness to take risks that some other banks have avoided since 2008.

Wells ranks as the nation's largest mortgage lender, and the spring home selling season was expected to boost home loans from the first quarter. But home purchases this spring have been slower than many in the industry had hoped.

Investors doubted whether Wells could keep up its earnings growth, especially after last quarter when the bank's results were lifted by non-recurring gains like a large tax benefit and strong gains in its portfolio of stocks and private equity investments.

Based in San Francisco, Wells has a track record for keeping down expenses, even as compensation soars at many of its Wall Street peers. Wells' efficiency ratio – a measure of the bank's attempts to keep manage costs – was 57.9 percent, in line with the first quarter.

Wells' results in the second quarter reflect improvement in the broader United States economy. Wells released $500 million in reserves, the same as the $500 million in the previous quarter.

Typically, a large release means that the bank is feeling more confident that losses on credit cards and other loans are likely to decline in a brightening economy.

In another sign of the brightening credit outlook, Wells said its write-offs on bad loans, or so-called net charge-offs, declined by $435 million from the second quarter a year ago to $717 million.

In the past, Wells Fargo's strong results have stood out from other global banks like JPMorgan Chase and Bank of America, which report their results next week. One reason for its strong performance is that Wells depends far less on trading and other traditional Wall Street activities that are under pressure in the low-interest rate environment.

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