Key points:
- WTC shares dropped 3.5% on weaker than expected revenue
- Although earnings were solid following lowered credit reserves, lower mortgage lending weighed on revenue
- Macro concerns continue to affect positive sentiment regarding economic growth
Anticipation regarding this week's big bank earnings follows a tough economic environment; speculation regarding interest hikes and broader financial volatility have spurred investors to think twice over buying into banking shares after a tightening of consumer spending has trickled down into mortgage rates. Wells Fargo (NYSE: WFC) shares dropped around 3.5% in Thursday premarket trading following a clear drop in mortgage lending, despite beating on earnings as a result of lowered credit reserves.
A sharp 33% drop in home lending from last year reveals a tightening landscape for home buyers, repelled by increasing mortgage rates as the Fed continues its decision to keep hiking interest rates. Critical for banking revenue, the deepening issue of inflation seems to be hitting banks where it hurts. Wider worries surrounding economic growth have also weighed on WFC shares, as summarized by CEO Charlie Scharf:
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“Our internal indicators continue to point towards the strength of our customers’ financial position, but the Federal Reserve has made it clear that it will take actions necessary to reduce inflation and this will certainly reduce economic growth”
Q1 earnings for Wells Fargo came in at $0.88 per share, bearing the $0.80 consensus. However, shares dropped on lower than expected revenue; coming in at $17.59B compared to estimates of $17.8B.
The main hurdle for growth following the bank’s earnings was Mortgage banking income; which totaled $693M in Q1, down heavily from $1.3B a year ago. Whilst the Street factored in economic concerns with an expectation of $880M, Wells still fell short.
Global concerns regarding economic growth are inherent results on the current Ukraine-Russia conflict, and hence financial institutions find themselves vulnerable to additional downside risk.