What is winning season, but controlled play?
Banks and other companies measure themselves not only against their previous results, but also against analysts’ forecasts.
Some bets pay off – or not – in the short term. Others become pillars of a longer-term strategy.
Wells Fargo saw one of each in its quarterly results on Friday. The bank reported a short-term surprise – $576 million in equity write-downs, mostly from affiliated venture capital activities.
But the executives also laid out their long-term thoughts on a somewhat plummeting business segment. Mortgage bank revenue fell 79% in the quarter to $287 million — a far cry from the $392.4 million estimated by analysts, according to Bloomberg. That plunged the bank’s home loan revenue to $972 million, down 53% from the nearly $2.1 billion the bank raked in in the second quarter of last year.
Wells Fargo has launched at least two rounds of layoffs since April in the home lending industry, affecting nearly 200 workers in Iowa – where the bank’s mortgage division is based.
The bank’s chief financial officer, Mike Santomassimo, left open the possibility of further job cuts. “We are making adjustments to reduce spending in response to lower origination volumes, and expect these adjustments to continue over the next two quarters,” he said Friday, according to American Banker.
At the same time, Wells prioritized its existing mortgage customers, CEO Charlie Scharf said, but would add to its user base “to the extent we have efficiencies.”
“We’re not interested in being extraordinarily big in the mortgage business, just for the sake of being in the mortgage business,” Scharf said, according to American Banker. “We are in the home loan business because we believe home loan is an important product that we need to talk to our customers about, and that will ultimately determine the appropriate size of it.”
Scharf has reviewed the composition of the bank’s business since taking over as CEO in 2019 and has regularly sought to offload segments deemed “non-core”.
However, refinancing – a source of income for existing customers – is relatively drying up. About 28% of the bank’s mortgage originations in the second quarter came from refinancing, up from 59% in December. Rising interest rates are undoubtedly at least partly responsible for the refi drought.
Low stake betting
Elsewhere on its balance sheet, Wells Fargo added $580 million to its loan loss reserves — roughly the same amount the bank lost to equity securities.
The pandemic has shown that loan loss reserves are pretty low stakes, as bets go. Provided analysts initially overestimate potential losses, the bank can simply reinject excess reserves into gen-pop once the financial threat subsides. Wells Fargo, for example, released $1.6 billion of its loan loss reserves in the second quarter of last year, and the big banks since then have generally continued to cut the funds they had raised. at the start of COVID-19.
Wells wouldn’t be the only one to increase his reserves. JPMorgan Chase built up its reserves by $428 million in the second quarter, it reported Thursday. Citi, meanwhile, has accumulated $375 million in reserves. In contrast, Bank of America announced on Monday that it had released $48 million from its reserves during the second quarter. In three months, observers may begin to see which philosophy wins out.
Or maybe everything is subject to change
Still other banks have found alternative methods to optimize their balance sheets. State Street said on Friday it was considering changing the terms of its proposed acquisition of Brown Brothers Harriman’s investor services business, including the purchase price, set at $3.5 billion in the announcement of the agreement last September.
State Street wants to preserve the economic growth it aimed for when it announced the deal, chief financial officer Eric Aboaf said Friday. This may involve changing the structure or operating model of the combined entity. But this too is not without risks.
“The regulatory world and the political world have changed significantly since we announced this deal and what we are looking at [is] a way to break through and close it in a reasonable amount of time,” State Street CEO Ronald O’Hanley said, according to S&P Global.
The closing of the transaction has already been delayed for several months and the parties now aim to complete the agreement by the end of this year.
“That period doesn’t seem reasonable to anyone, but it’s actually better than some of the alternatives we’ve faced,” O’Hanley said.
If State Street and Brown Brothers Harriman fail to agree on updated terms by September 6 – a year after the proposal was announced – either can terminate the agreement without penalty.