NEW YORK (REUTERS) - Wells Fargo & Co posted a better-than-expected quarterly profit, but revenue fell short of expectations as the lender's mortgage business continued to remain a dark spot.
While higher interest rates have helped banks earn more on loans, borrowers have shied away from refinancing their loans, hurting mortgage business across the banking industry.
Wells Fargo's shares were down 2.1 per cent in premarket trading. Shares of JPMorgan Chase and Citigroup, which also reported better-that-expected profits, were down about more than 2 per cent.
Wells Fargo, the largest US residential mortgage lender, recorded an 18.8 per cent fall in mortgage banking income to US$1.15 billion (S$1.58 billion).
JPMorgan, its closest rival in mortgage banking, posted a 41 per cent decline in mortgage fees and loan servicing revenue. Wells Fargo's total revenue remained flat at US$22.17 billion and missed analysts' average estimate of US$22.47 billion.
Mortgage banking was not the only drag. Wholesale banking was particularly weak, with noninterest income falling by 21 per cent to US$2.67 billion.
The bank attributed the decline to the US$290 million sale of a health benefit service business a year ago, as well as lower results from trading and principal investing.
However, it was not all gloom for the third-largest US bank by assets. Net interest income, a measure that reflects earnings relative to funding costs, rose 6.4 per cent to US$12.48 billion.
The US Federal Reserve raised interest rates for the second time this year in June, and indicated another possible hoist this year. The bank also set aside less money to meet any future loan losses. Provisions nearly halved to US$555 million, helped by an improving energy loan portfolio.
Net income rose 4.5 per cent to US$5.40 billion, or US$1.07 per share, in the quarter ended June. 30, beating the average analyst estimate of US$1.01, according to Thomson Reuters I/B/E/S.
Wells Fargo has also been struggling with high costs as it battles lawsuits related to a sales scandal last year, which involved employees creating millions of unauthorized accounts in customers' names to meet sales targets.
The San Franscisco-based lender said noninterest expenses rose about 5 per cent to US$13.54 billion. "We continued to make progress this quarter in our efforts to rebuild trust ... while there is still more work ahead of us, we are on the right track and I am confident about our future", chief executive Tim Sloan said.
The company doubled its cost-cutting goals in May and plans to reduce costs by US$4 billion through the end of 2019.