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Wells Fargo Tops Estimates as Loan-Loss Release Offsets Interest Income Drop

Wells Fargo posts second-quarter earnings that beat forecasts as it lets go of loan-loss provisions held through the pandemic, offsetting a drop in net interest income.

Wells Fargo  (WFC) - Get Wells Fargo & Company Report on Wednesday posted second-quarter earnings that beat analysts' forecasts as the bank let go of loan-loss provisions held on its books as insurance against pandemic-related losses, which helped offset a decline in net interest income.

San Francisco-based Wells Fargo reported net income of $6.04 billion, or $1.38 a share, for the second quarter vs. a loss of $3.85 billion, or $1.01 a share, in the comparable year-earlier quarter. Analysts polled by FactSet had been looking for earnings of 98 cents a share.

Revenue was $20.27 billion, down from $18.28 billion in the second quarter of 2020. Net interest income was $8.8 billion, down from $9.89 billion a year ago, while non-interest income was $11.47 billion, up from $8.39 billion. 

Average deposits rang in at $1.44 trillion, up $75.9 billion, or 6%, from a year earlier. Average loans were $854.7 billion. Net interest income fell 11%, primarily due to the impact of lower interest rates and lower loan balances, reflecting soft demand and elevated prepayments, as well as higher mortgage-backed securities premium amortization, partially offset by a decline in long-term debt," the bank said.

Wells Fargo said $1.6 billion, or 28 cents a share, of total second-quarter earnings, were the result of a decrease in the bank's allowance for credit losses. 

The results also included a $208 million gain on the sale of student loans, and $104 million write-down of related goodwill. The bank's provision for second-quarter credit losses decreased $10.8 billion, or 2 cents a share.

Wells also reported a net interest margin — a measure of how much a bank earns from the difference between what it pays on deposits and what it takes in on loans — of 2.02% for the quarter. Analysts were expecting 2.05%, according to FactSet. 

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Real Money Pro contributor Stephen "Sarge" Guilfoyle told TheStreet on Tuesday that much of the banks' per-earnings gains are the result of releasing loan-loss reserves built up during the pandemic but not required or deployed - something that helped bolster JPMorgan Chase's  (JPM) - Get JPMorgan Chase & Co. (JPM) Report per-share earnings.

"Hey, it’s their money and their profit, and we’re not poo-pooing that, but it really doesn't represent the quarter," Guilfoyle said. "If you take that out, the quarter doesn't really beat by all that much, and it might even be considered a miss."

At the same time, question marks surrounding the broader policy outlook and interest rates as well as competition in the banking and investing sector could make it challenging to navigate which banks are better positioned than others, Guilfoyle said.

Earlier this week, JPMorgan Chase (JPM) - Get Report posted a 37% increase in investment banking revenue that helped offset an 8% slump in net interest income.

Goldman Sachs Group (GS) - Get Report, meantime, posted a 36% surge in investment banking revenue, helping it record stronger-than-expected earnings.

At last check, shares of Wells Fargo were up 0.49% at $43.45.

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