While the nation’s two largest banks reported fourth-quarter 2022 earnings that beat analysts’ expectations, the financial results for the nation’s third-largest bank told a very different story.
Wells Fargo reported fourth-quarter net income of $2.9 billion, or 67 cents per diluted share, half of what it reported a year earlier, when it earned $5.75 billion, or $1.38 per diluted share.
Revenue fell 5.7% to $19.66 billion, below the $19.98 billion analysts had expected, according to Refinitiv.
Wells Fargo attributed the dramatic decline in earnings to a steep drop in mortgage originations, which fell 57.4% to $786 million in the fourth quarter from $1.84 billion a year earlier. The bank began laying off staff from its Home Lending business in April, after reporting the largest drop in quarterly net income it had seen since 2003. It laid off additional staff from the unit in July.
It reported a charge of $353 million, or 7 cents per diluted share, for severance expense primarily in home lending for the fourth quarter.
In addition, Wells Fargo announced Tuesday a strategic plan to create “a more focused home lending business aimed at serving bank customers, as well as individuals, and families in minority communities.”
In particular, the bank said it “is exiting the correspondent business and plans to reduce the size of its servicing portfolio. These plans continue the work the company has advanced over the past three years to simplify this business.”
While feeling the impact of pulling back from being the biggest bank in the mortgage origination industry, Wells Fargo also was setting aside $957 million for credit losses, a big change from reducing its credit-loss provision by $452 million a year earlier.
It also reported $3.3 billion, or $0.70 per diluted share, in operating losses primarily related to “a variety of previously disclosed historical matters, including litigation, regulatory, and customer remediation matters.”
That refers to a settlement Wells Fargo reached with the Consumer Financial Protection Bureau in December that required the bank to pay $3.7 billion for violations across several of its largest product lines — including mortgage and auto loans — that the CFPB claims resulted in thousands of customers allegedly losing billions of dollars, and in some cases, their homes and cars.
The fine, which Wells Fargo agreed to pay, includes $2 billion in payments to consumers and $1.7 billion in civil penalties.
One positive in the report was a 45% increase in net interest income, which totaled $13.43 billion in the fourth quarter compared to $9.26 billion a year earlier. The increase was attributed to rising interest rates.
Chief Executive Officer Charlie Scharf focused on the good aspects of the report.
“Though the quarter was significantly impacted by previously disclosed operating losses, our underlying performance reflected the progress we are making to improve returns,” he said. “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.”
He continued, “The operating losses incurred in the fourth quarter reflect an important milestone in our work to resolve historical issues. Our broad-reaching agreement with the CFPB in December helps resolve multiple matters, the majority of which have been outstanding for several years.”
Scharf added that, over the past three years, Wells Fargo has “made significant changes to address the matters referenced in the settlement and many of the required actions were already substantially complete prior to this announcement. While our risk and regulatory work hasn’t always followed a straight line and we have more to do, we have made significant progress, and are moving forward.”
