I note with interest – and concern – a step that’s a very clear forecast of what lies ahead for consumers in the US economy.
Wells Fargo & Co said on Friday its second-quarter profit nearly halved as the bank set aside more funds to cover potential loan losses, while its mortgage lending business came under pressure from higher interest rates.
The fourth-largest U.S. bank reported profit of $3.1 billion, or 74 cents per share, compared with $6 billion, or $1.38 per share, a year earlier. Its total loan loss provisions were $580 million in the quarter, including a $235 million increase due to loan growth.
Under an accounting standard that took effect in 2020, banks must factor the economic outlook into loan loss reserves. Last year, the bank had released $1.6 billion from its reserves for loan losses as the economy rebounded from the pandemic.
Wells Fargo Chief Financial Officer Mike Santomassimo told reporters that retail and business customers remain strong, but the bank is prepared for a potential economic downturn.
“Things will probably get worse, but that’s already included in the overall scenario analysis and the allowance level we have for the quarter,” Santomassimo said.
. . .
Big bank executives have sounded cautious so far this earnings season, with JPMorgan Chase & Co’s Chief Executive Jamie Dimon likening the macroeconomic environment to a coming “storm.”
There’s more at the link.
Wells Fargo isn’t alone in increasing its reserves and provisions against default by its customers. Nevertheless, the numbers above are a bit mind-boggling. For a start, “its second-quarter profit nearly halved“. Even with additional provisions against future losses, that’s astonishing. Banks, like all other corporations, must pay dividends to their investors (shareholders). For Wells Fargo to say to its shareholders, “Sorry, your income from your investment in us has just been cut in half”, and for them not to complain about it, speaks volumes. They’re worried that if they don’t make the investment in reserves right now, they’ll be out a lot more money in future.
Secondly, this one bank has taken more than half a billion dollars of its own profits, in a single quarter, and allocated them as a reserve to write off debts – loans, mortgages, whatever – that it expects its customers to be unable to repay. What’s it going to allocate next quarter? And the one after that? This is unlikely to be a one-off budgetary provision. It’s the first major step in what’s likely to become a longer-term major problem.
Finally, what does it say about Wells Fargo’s expectations for the US economy? Clearly, the bank isn’t greatly encouraged by what it sees “on the street”. There’s an old saying that “Money talks, bull**** walks”. Well, one of the biggest banks in the USA is talking with its money, despite the glowing forecasts by our politicians that all will be well. It’s treating those forecasts as something that needs to walk. That speaks volumes.
“He who has ears to hear, let him hear.”