Pandemic, Rate Squeeze Hits Wells Fargo Results

Tom Burroughes

15 July 2020

Wells Fargo yesterday logged a net loss of $2.4 billion in the second quarter of 2020, sliding from a net income of $6.2 billion a year ago, as interest rate cuts hit margins and as the global pandemic hit the bottom line. The US banking group’s chief executive, Charlie Scharf, said the lender was “extremely disappointed” by the results.

“Our view of the length and severity of the economic downturn has deteriorated considerably from the assumptions used last quarter, which drove the $8.4 billion addition to our credit loss reserve in the second quarter. While the negative impact of the pandemic is unprecedented and many of our business drivers were negatively impacted, our franchise should perform better, and we will make changes to improve our performance regardless of the operating environment,” Scharf said.

In addition to the higher reserve, net interest income declined in the quarter primarily due to the impact of significantly lower market interest rates. The bank said its second quarter results also included $1.2 billion of operating losses, primarily due to customer remediation accruals.

Wealth, asset management
Within the wealth and asset management division, which includes the Abbot Downing business catering to ultra-high net worth individuals, Wells Fargo said that net income slid by 70 per cent, or $422 million, in Q2 from a year earlier. Revenue fell by $390 million, or by 10 per cent, predominantly due to lower net interest income, asset-based fees, and brokerage transactional revenue, partially offset by higher net gains from equity securities driven by a $118 million increase in deferred compensation plan investment results .

Non-interest costs, meanwhile, fell by $93 million, or 3 per cent, mainly due to lower equipment expense related to the continued evaluation of technology projects, lower broker commissions and other personnel expenses, partially offset by higher regulatory, risk, and technology expense, as well as higher employee benefits expense driven by a $107 million increase in deferred compensation expense .

Wells Fargo said provision for credit losses rose by $258 million, predominantly due to a $255 million increase in the allowance for credit losses in second quarter 2020 driven by current and forecasted economic conditions due to the COVID-19 pandemic.