Wells Fargo lays out bleak timeline for economic recovery

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Like its rival JPMorgan Chase, Wells Fargo is bracing for a rough year ahead.

Even as some political leaders predict that the economy will bounce back quickly from the coronavirus pandemic, officials at the nation’s fourth-largest bank say they expect the economy will contract this year and grow only modestly, if at all, in 2020. The bank is also forecasting a prolonged stretch in which the U.S. unemployment rate sits in the high single digits.

The bank is relying less on “sharp recoveries” and thinking more about “a long, slow burn over the next couple of years” as it manages its own risks, Chief Financial Officer John Shrewsberry said on a conference call with reporters Tuesday.

JPMorgan Chase and Wells Fargo were the first of the nation’s large banks to report first-quarter results on Tuesday.

Similar to JPMorgan, Wells Fargo has dramatically increased its reserves for loan losses in the first quarter as it prepares for a wave of consumer and commercial loan defaults brought on by the economic fallout of the coronavirus outbreak.

For the quarter, the bank set aside $4 billion for loan losses, up from $845 million in last year’s first quarter. As a result, earnings plunged by nearly 90% from the same period last year, to $635 million, marking the bank’s lowest quarterly profit since 2008.

The size of the provision far eclipsed what analysts were expecting and shows just how quickly economic conditions have deteriorated over the past month.

“At the end of the day there are still a lot of unknowns about credit,” said Brian Kleinhanzl, an analyst at Keefe, Bruyette & Woods.

CEO Charlie Scharf said on a conference call with analysts that the depth of the economic pain will depend how long on the economy remains shut down. But like his counterpart at JPMorgan, Jamie Dimon, he suggested that the economy shouldn’t fully reopen until widespread testing is available.

“What’s important is controlling the spread of the virus,” he said.

On an earnings call earlier in the day, Dimon said that May would be too soon for businesses to start serving customers again and that summer would be a more realistic time frame.

Below are three additional takeaways from Wells Fargo’s first-quarter results.

Credit line utilizations surge

Like other big banks, Wells Fargo has substantial exposure to companies that have been hit particularly hard by the coronavirus emergency. Its commercial loans outstanding include $27.8 billion to the retail sector, $16.2 billion to the entertainment and recreation sector, $14.3 billion to the oil and gas sector, and $11.9 billion to the transportation sector.

Over the last month, commercial customers have been drawing on existing lines of credit as the economic fallout of the pandemic has spread. Wells reported Tuesday that loan utilization rates in its commercial banking unit hit 48.6% in March, up from 40% in December.

Higher utilization rates can be worrisome if commercial customers are turning to their banks in a bid to stay afloat, but Shrewsberry said that the trend has abated in April as corporate customers have been able to tap other sources of credit.

“It’s worth noting that the high rate of growth in line utilization by our commercial clients has backed off since credit markets have reopened,” he said.

Consumers need immediate loan relief

Wells Fargo said that it has received more than 1 million requests for payment deferment or forbearance since the crisis began, predominantly from consumers whose mortgages and auto loans are serviced by the bank.

The surge in call volume has prompted Wells to plow more resources into its loan servicing operations, according to Shrewsberry. He indicated that higher staffing levels are likely to continue for a lengthy period of time.

“And we’re trying to make it easier for people to request deferrals, so that they can be done in a more automated way,” he added during the call with reporters.

During an earlier call with analysts, Shrewsberry noted that the spike in deferred payments will reduce the bank’s interest income in the short term, though he downplayed the likely size of that effect. Wells Fargo announced Tuesday that it is withdrawing its guidance on net interest income for 2020.

Expense reductions are on hold

Just three months ago, Scharf was signaling a sharp focus on cutting expenses. “There are still big parts of the company where we are extraordinarily inefficient,” the recently arrived CEO said during a Jan. 14 conference call.

While analysts were pleased with the company’s progress in the first quarter — noninterest expenses declined by 6% from the same period a year earlier — bank officials signaled Tuesday that expense cuts are no longer a priority amid the COVID-19 crisis.

Wells Fargo is halting previously planned staff reductions, according to Shrewsberry. “The ultimate efficient outcome is very high on Charlie’s list of priorities,” he told reporters, “but this is not the time for it.”

Wells said that it has made a one-time cash award to approximately 165,000 employees who make less than $100,000 a year. The bank is making additional payments to workers who are working on the front lines of the crisis.

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Commercial lending Credit quality Consumer lending Wells Fargo Coronavirus Charles Scharf
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