WASHINGTON (AP) – Wells Fargo easily beat Wall Street’s third-quarter (Q3) revenue forecasts as higher interest rates helped offset a steep decline in home lending.
The nation’s biggest mortgage lender brought in USD19.5 billion in revenue for the period, thanks to USD12.1 billion in net interest income, a 36 per cent increase from the same period a year ago. Wells earned 85 cents per share in the period, falling short of Wall Street’s profit projections. The company incurred USD2 billion in regulatory and litigation expenses, the equivalent of a 45 cents-per-share loss. Analysts expected profit of USD1.09 in the period. Wells earned USD1.17 per share in last year’s Q3.
Shares in the San Francisco bank were up three per cent in afternoon trading.
Wells has benefitted from the Federal Reserve’s (Fed) aggressive interest rate hikes this year as the central bank tries to tamp down the highest inflation in four decades.
The Fed has raised rates five times this year, including three consecutive 0.75 percentage point hikes that pushed its key short-term rate to a range of three per cent to 3.25 per cent, the highest level since 2008. Wall Street expects another large three-quarter-point hike at the Fed’s meeting early next month.
While those higher interest rates have padded Wells’ bottom line, the flip side is that fewer people are in the market for home mortgages. Wells Fargo reported that its home lending revenue fell 52 per cent from last year, when mortgage rates were less than half of the current 6.92 per cent.
Many economists and investors fear that the Fed’s aggressive rate hikes could tip the United States (US) economy – which contracted the first half of the year – into a full-blown recession. Big banks are back to setting aside large amounts of cash in the event of a recession. Wells boosted its reserves to USD784 million, including a USD385 million increase for credit losses due to loan growth and a “less favourable economic environment”.
Wells is still trying to exit the strict federal guidelines that sets its asset cap at just under USD2 billion, hindering its ability to grow.