Wells Fargo Beats on Profit, Revenue as Turnaround Takes Hold

(Bloomberg) -- Wells Fargo & Co. beat analysts’ estimates for second-quarter profit, revenue and expenses, a sign Chief Executive Officer Charlie Scharf’s turnaround is taking hold.

The bank reported a $1.6 billion release of reserves previously set aside for bad loans, with $1.3 billion of that amount falling directly to the bottom line, according to a statement Wednesday. That pushed net income to $6 billion, compared with the $4.4 billion estimate in a Bloomberg survey of analysts.

Scharf, who took over atop the nation’s fourth-largest lender almost two years ago, has embarked on a series of cost-cutting initiatives as part of his effort to boost profitability after years of scandals. Non-interest expenses dropped 8.3% to $13.3 billion in the second quarter, while analysts were expecting a 7.3% decline.

“By most metrics, we are making significant progress,” Scharf said on a conference call with analysts. “This is just the start of a multiyear process to transform Wells Fargo.”

Shares of San Francisco-based Wells Fargo climbed 3.2% to $44.60 at 1:25 p.m. in New York, the only company in the 24-member KBW Bank Index to post a gain.

Average loans tumbled in the second quarter as consumers and businesses, buoyed by pandemic stimulus programs, refrained from more borrowing. The average balance of the bank’s lending book dropped 12% to $854.7 billion. The result mirrored a similar decline at Bank of America Corp., which said earlier Wednesday that loans and leases in its consumer-banking unit also fell 12%.

Unprecedented levels of U.S. government aid have left consumer and corporate balance sheets in healthy shape, meaning more loans aren’t a top priority. Executives across the industry have predicted a wave of spending will drive loan growth, but that hasn’t yet materialized.

“The headwinds of low interest rates and tepid loan demand remained,” Scharf said in the statement.

Net interest income, a key source of revenue for the bank, sank 11% to $8.8 billion, while analysts were expecting a 10% drop. The firm has said it expects the full-year figure will be unchanged to down 4% from the annualized fourth-quarter level, which was $36.8 billion, and it maintained that outlook Wednesday.

Employee Levels

Headcount fell to 259,196 from 264,513 at the end of March. Wells Fargo began a series of layoffs last year after pressure to dramatically reduce costs came to a head when the firm reported a quarterly loss.

The bank is still under a costly Federal Reserve-imposed asset cap limiting its balance sheet to its size at the end of 2017. Earlier this year, Wells Fargo scored a sign of progress in its efforts to escape the penalty by securing the Fed’s acceptance of a proposal for overhauling risk management and governance. Period-end assets were $1.95 trillion, down from $1.97 trillion a year earlier.

“Honestly, we’re not even thinking about what life is like without the asset cap,” Scharf said in response to a question about how much bigger Wells Fargo might be were it not for the restriction. “That’s not an excuse for us not to do some other things, and when we get to the future we’ll talk about it.”

Read more: Wells Fargo Wins Fed’s Nod for an Overhaul Plan Tied to Cap

Also in the second-quarter results:

• Revenue surged 11% to $20.3 billion, beating analysts’ estimates of $17.8 billion.
• The bank’s efficiency ratio, a measure of profitability, improved to 71% from 72% in the first quarter.

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