Weaker-than-expected mortgage lending leads to a miss in quarterly revenue for Wells Fargo, causing its shares to decline.

• The earnings per share were 88 cents, higher than the 80 cents estimate from Refinitiv.
• Revenue: $17.59 billion vs. $17.8 billion estimate.
• Home lending at Wells Fargo decreased by 33% compared to the previous year due to the increase in mortgage rates.

On Thursday, the bank reported lower-than-expected first-quarter revenue due to a decline in mortgage lending, but exceeded earnings expectations by reducing its credit reserves.

The company’s shares closed 4.5% lower on Thursday.

Here are the numbers:

• Earnings: 88 cents a share, vs. 80 cents estimate from Refinitiv.
• Revenue: $17.59 billion, vs. $17.8 billion estimate.

In the first quarter, Wells Fargo reported a 20.8% drop in profit from the previous year, totaling $3.67 billion.

Home lending at Wells Fargo decreased by 33% compared to the previous year, which was attributed to the slowing of mortgage demand due to the Federal Reserve's decision to increase interest rates in an effort to combat inflation.

CEO Charlie Scharf stated that the Federal Reserve's actions to reduce inflation will definitely slow down economic growth.

Russia's invasion of Ukraine has caused uncertainty in financial markets and raised doubts about global economic growth, which coincides with Wells Fargo's first-quarter results.

Scharf stated that the conflict in Ukraine increases the likelihood of negative outcomes.

The decrease of $1.1 billion in allowances for credit losses positively impacted the bank's first-quarter earnings, resulting in an addition of 21 cents of profit per share, as stated by Wells Fargo.

Wells Fargo announced that it released funds reserved for potential losses due to decreased uncertainty about the economic impact of the COVID-19 pandemic on its loan portfolios and a reduction in net charge-offs.

In contrast to the actions of its rivals, which announced a $902 million charge on Wednesday for building reserves to account for expected credit losses.

However, Wells Fargo warned more loan losses could be on the horizon.

Scharf stated that although credit losses may increase from their current lows, we will still benefit from rising rates, a strong capital position, and a lower expense base, which will result in greater margins for investment.

While larger banks have significant Wall Street operations, Wells Fargo concentrates on U.S. retail and commercial banking clients. Analysts predict that Wells Fargo will benefit significantly from rising interest rates and a resurgence in loan growth, which will increase the interest income it receives.

Wells Fargo reported that the average loans totaled $898 billion, which is a 3% increase from the previous year and also a 3% increase from the fourth quarter.

The bank's net interest income of $9.2 billion was in line with the StreetAccount consensus estimate and 5% higher than the previous year. This revenue comes from the bank's interest-bearing assets, such as loans and mortgages, minus the amount paid out on deposits like savings accounts.

According to CFO Mike Santomassimo, the bank anticipates that the mortgage market has experienced its largest quarterly decline since 2003. In the first quarter, mortgage banking income totaled $693 million, which is a significant decrease from the $1.3 billion reported in the previous year. Analysts surveyed by StreetAccount had predicted $880 million in mortgage banking income.

Santomassimo stated on Wells Fargo's earnings call that we anticipate that second-quarter originations and margins will remain under pressure, and mortgage banking revenue will continue to decline. In response to the decline in volume, we have started to reduce expenses and expect them to decline further throughout the year as we remove excess capacity and align it with lower business activity.

Despite the bank's projection of overall full-year expenses at $51.5 billion, it acknowledged that predicting operating losses can be difficult.

This year, Wells Fargo's shares have decreased by approximately 3%, making it the best performing among the six largest U.S. banks. In contrast, most of these banks, including JPMorgan, have experienced double-digit declines, with JPMorgan's shares dropping about 20%.

Rival banks ,  and also reported quarterly results Thursday.

Since October 2019, Wells Fargo has been led by Scharf and is still subject to consent orders due to its 2016 fake accounts scandal, including a Fed order that limits its asset growth.

Wells Fargo increased its allowance for credit losses by $1.1 billion.