Wells Fargo on Tuesday reported financial results that reflect the challenges U.S. banks continue to face in boosting their profitability.
The San Francisco-based lender, the fourth-largest U.S. bank by assets, said it made profit of $5.72 billion, or $1.03 a share, in line with analysts’ expectations. That compared with $5.73 billion, or $1.01 a share, in the second quarter of 2014.
Even as it posted a profit, Wells Fargo, like other lenders, is still grappling with low interest rates that are taking a toll on profitability. The lender also said Tuesday that businesses and consumers remain hesitant to borrow even as the U.S. economy recovers.
Here are four takeaways from Wells Fargo’s results:
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1. It’s still hard to make money from lending
Like banks everywhere, Wells Fargo continues to be affected by the Federal Reserve’s low interest rates, which are constraining what lenders can earn from loans.
Wells Fargo’s net interest margin, a key measure of lending profitability, fell to 2.97 percent from 3.15 percent a year earlier. It rose slightly from 2.95 percent in the first quarter.
Independent bank analyst Nancy Bush said low interest rates are largely to blame for banks’ difficulties in growing revenues. So, even as lenders make more loans, low interest rates crimp how profitable they can be.
Wells Fargo grew revenue by about 1 percent in the quarter to $21.3 billion, although it missed analysts’ expectations for $21.7 billion. Rival JPMorgan Chase & Co. posted a 3.2 percent drop in revenue compared with the same quarter last year.
Bush described it as an “OK” quarter for Wells, as its “mortgage trends were pretty good.” Wells Fargo, the largest U.S. mortgage lender, reported originating $62 billion in home loans in the second quarter, up 32 percent from a year ago. It also said it had $38 billion in mortgage applications at the end of the quarter, up from $30 million a year ago.
But the lender also reported higher expenses from a year ago, which it partially attributed to personnel costs as it spends more in compliance and regulatory areas.
2. Economy’s up, but borrowers ‘holding back’
The economy may be recovering, but consumers aren’t rushing to borrow, Wells Fargo says.
“In some of our material businesses, we’ve got customers who have been holding back on their borrowing capacity,” Chief Financial Officer John Shrewsberry said Tuesday. That’s particularly true for businesses, he said.
CEO John Stumpf said there is “a fair amount of capacity to carry more debt” among consumers and small and midsize companies. “Most Americans – businesses and consumers – have de-risked and de-leveraged their balance sheets, so there are opportunities” for lenders.
Overall, Stumpf was upbeat about the direction of the U.S. economy, pointing to job gains and improvements in consumer confidence.
3. Low oil prices: Good for drivers, bad for banks?
U.S. consumers have enjoyed the recent drop in gasoline prices that have come from declines in oil prices. But Wells Fargo said the lower oil prices have hurt energy companies, causing them to miss payments on loans made by Wells.
The lender said it had a $416 million increase in commercial and industrial loans with missed payments. A substantial amount of that figure was in energy loans, Wells said.
4. Get ready to hear more about ‘efficiency’
Wells execs on Tuesday provided details on the “Efficiency and Effectiveness” program it announced internally during the second quarter to streamline five major departments.
Shrewsberry, the CFO, said the lender is seeking to “re-purpose our expense dollars to their highest-value area.” He said the initiative is focused on “operational improvements.”
“It’s around some of our staff functional alignments, some of our technology spend, etc. It really is designed to make sure that where we’re spending money – and of course we spend a lot of it – that we’re putting it in the most impactful places.”
Wells Fargo has not disclosed how many job losses might result from the program.
The bank’s shares closed Tuesday at $57.25, up nearly 1 percent. Charlotte-based Bank of America reports earnings Wednesday.