COVID-19 Blamed For $2.7B Second-Quarter Loss At Wells Fargo

The COVID-19 pandemic's crushing impact on the U.S. economy led to a significantly larger blow to Wells Fargo & Co.'s financial health during the second quarter.

The bank reported Tuesday having a $2.69 billion loss, compared with $42 million in net income in the first quarter and $5.85 billion a year ago.

It is Wells Fargo's first quarterly loss since the Great Recession of 2008 as it was taking over a collapsing Wachovia Corp.

Perhaps more importantly, the board of directors plans to drastically reduce the quarterly dividend from 51 cents to 10 cents, starting with the third quarter. It is an 80.4% reduction.

Investors responded to the glum financial news with as much as an 8.6% share-price decline during trading Tuesday before the stock closed down $1.17, or by 4.6%, to $24.25 .

The quarterly loss would have been much larger if Wells Fargo did not gain a $3.92 billion income-tax benefit in the quarter, compared with an income-tax expense of $1.29 billion a year ago. The benefit came mostly from the federal corporate tax-rate cut that went into effect in 2017.

Wells Fargo reported an earnings loss of 66 cents a share, compared with diluted earnings of 1 cent in the first quarter and $1.30 a year ago.

As projected, the main factor in the quarterly loss was the bank taking a stunning $8.4 billion loan-loss provision on top of a $3.83 billion provision in the first quarter.

The provision is designed to help banks absorb losses on loans it expects won't be repaid on time. It is a short-term measuring stick for how a bank expects its loan portfolio and revenue stream to perform as customers struggle to make monthly payments.

"We are extremely disappointed in both our second-quarter results and our intent to reduce our dividend," Charlie Scharf, Wells Fargo's chief executive, said in a statement. "Our view of the length and severity of the economic downturn has deteriorated considerably from the assumptions used last quarter, which drove the $8.4 billion addition to our credit loss reserve in the second quarter.

"While the negative impact of the pandemic is unprecedented and many of our business drivers were negatively impacted, our franchise should perform better, and we will make changes to improve our performance regardless of the operating environment," Scharf said.

The bank did not provide a breakdown of what the provision was worth in relation to the quarterly earnings loss. The first-quarter provision was worth 56 cents a share.

The average earnings forecast was a loss of 16 cents by 11 analysts surveyed by Zacks Investment Research. Analysts typically do not include one-time gains and charges in their forecasts.

Wells Fargo typically serves as a bellwether for financial stocks each quarter because it is among the first, along with Citigroup and JPMorgan Chase & Co., to file its report.

The biggest shadow hanging over Wells Fargo is the Fed's order, issued Feb. 3, 2018, that prohibits the bank from increasing its total assets beyond the $1.93 trillion it had on Dec. 31, 2017. For banks, loans are considered assets.

Wells Fargo reported $9.88 billion in loan revenue, down 18% year over year.

Fee income fell 16% to $7.95 billion, the biggest factor being an 88% decline in the other category to $97 million, a 58% drop in mortgage banking to $317 million and 6% decline in trust and investment fees to $3.35 billion.

"With respect to the balance sheet, loans declined as commercial customers paid down loans that were drawn late in the first quarter during the market turbulence at the outset of the pandemic, while consumer deposit balances increased reflecting unprecedented government stimulus programs, lower spending and customers' preferences for liquidity," said John Shrewsberry, the bank's chief financial officer.

Non-performing assets were at $7.8 billion as of June 30, up from $6.41 billion on March 31 and $6.3 billion on June 30, 2019.

Net charge-offs were at $1.11 billion on June 30, compared with $909 million on March 31 and $653 million on June 30, 2019.

CFRA analyst Kenneth Leon lowered his share-price target by $13 to $26, and his fiscal 2020 earnings guidance from $2 to 25 cents.

"We think the bank's large loan exposure in commercial real estate is exposed to nonperforming loans in the second half of 2020," Leon said. "Other distressed industries are oil & gas, transportation, entertainment and retail."

[email protected]@rcraverWSJ