(Bloomberg) -- Wells Fargo & Co.’s credit costs surged in the first quarter, previewing a tough year at the helm for new Chief Executive Officer Charlie Scharf as the coronavirus pandemic brings the U.S. economy to a virtual standstill.
The firm set aside $4 billion in loan-loss provisions in the first quarter, almost five times what it allocated a year ago and the most in a decade. That contributed to an 89% drop in net income.
Bank earnings are being closely watched as investors assess the extent of the virus’s damage to the U.S. economy in the first month of lock-down orders across the nation. Wells Fargo is a top lender to consumers, small- and medium-size businesses, and commercial-property investors across the country, so its results offer a view into how bad things have gotten, and how much worse they may become.
“Wells Fargo plays an important role in the financial system and the economic strength of our country, and we take our responsibility seriously, particularly in these unprecedented times,” Scharf said in a statement Tuesday.
The lender joins JPMorgan Chase & Co. in having its profit hit by major provisions as the banks expect a spike in consumer and businesses falling behind on debt payments. JPMorgan posted its lowest net income since 2013 as it boosted reserves by more than $11 billion.
Scharf said that commercial clients used over $80 billion of their loan commitments in March alone.
“While we generally view loan growth as a positive for banks, in this instance, it is more indicative of businesses facing challenges and uncertainty,” Kyle Sanders, an analyst at Edward Jones, said in a note to clients Tuesday. “We attribute most of the loan growth to commercial clients tapping lines of credit in order to build cash reserves to weather the economic downturn.”
Provisions in the wholesale unit jumped 17 times from a year earlier, while the amount Wells Fargo set aside for the community bank more than doubled. The total amount of provisions reflected “the expected impact these unprecedented times could have on our customers,” Chief Financial Officer John Shrewsberry said in the statement.
The company’s shares rose 2.2% to $32.13 at 9:47 a.m. in New York, compared with a 2.1% increase in the 24-member KBW Bank Index. Wells Fargo is down 40% this year.
The San Francisco-based lender is constrained by a Federal Reserve order limiting assets to their end-of-2017 level following a series of scandals at the bank, though it was granted a temporary break last week to expand lending to small businesses. Total assets were just above that level at the end of the first quarter. Scharf said last week that Wells Fargo extended almost $70 billion in new and increased commitments and outstanding loans in March alone.
Wells Fargo has joined its peers in making a variety of promises to help keep customers afloat. The lender will offer grace periods to mortgage borrowers, pledged millions to charities and relief efforts, offered workers extra pay, and said it paused new job cuts.
The bank’s loan-loss figure factors in an accounting rule that took effect in January requiring banks to recognize potential losses more quickly. The rule requires lenders to predict how a deteriorating economy will spark defaults even before borrowers stop paying.
Wells Fargo’s longer-term strategy has been in flux since former CEO Tim Sloan stepped down more than a year ago. Scharf has been conducting a wide-ranging review of the firm, and has warned that there’s still much to be done. Expenses -- a sticking point for investors in recent years -- fell 6% in the first quarter from a year earlier.
Also in Wells Fargo’s first-quarter results:
- Net interest margin, the spread between lending rates and borrowing costs, widened to 2.58% from 2.53% in the last three months of 2019.
- Revenue fell to $17.7 billion, missing analysts’ expectations of $19.4 billion, the average of 18 estimates.
- The bank’s efficiency ratio, a measure of profitability, improved to 73.6% from 78.6% in the fourth quarter. Wells Fargo has been beset by heightened costs stemming from its scandals. It had been targeting 55% to 59% in the long term, excluding litigation costs, though Scharf may set a different goal.
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