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Wells Fargo shares tumble 8% after posting $2.4 billion loss, dividend slashed to 10 cents

Wells Fargo on Tuesday posted its first quarterly loss since the Great Recession as the bank set aside $ 8.4 billion in loan loss reserves tied to the coronavirus pandemic.

The bank had a net loss of $ 2.4 billion in the second quarter, or a loss of 66 cents a share, worse than the 20 cents a share loss expected by analysts surveyed by Refinitiv. Revenue of $ 17.8 billion was also weaker than analysts’ $ 18.4 billion estimate.

Shares of the bank plunged 8% in early trading. 

“We are extremely disappointed in both our second quarter results and our intent to reduce our dividend,” CEO Charlie Scharf said in the release. “Our view of the length and severity of the economic downturn has deteriorated considerably from the assumptions used last quarter, which drove the $ 8.4 billion addition to our credit loss reserve in the second quarter.”

The embattled banking giant was widely expected to post a loss as it had telegraphed its need to set aside billions of dollars for soured loans tied to the pandemic. The company is laboring under a dozen regulatory consent orders tied to its 2016 fake accounts scandal, including one from the Federal Reserve that caps its asset growth. These have made running the bank during the coronavirus crisis harder, and Scharf strongly hinted last month that he would have to cut expenses and jobs this year.

The bank’s bleak outlook for profits is one reason it was forced by regulators to cut its dividend from its previous level of 51 cents a share.

But on Tuesday the bank announced a new quarterly payout of 10 cents a share, a deeper-than-expected reduction to its dividend that may indicate the bank’s pessimism about the coming year. Wells Fargo was the only bank among the six biggest U.S. lenders to be forced to cut its dividend after the annual Federal Reserve stress test; all the others are maintaining their quarterly payouts.

The bank’s quarterly loss is a sharp reversal from the firm’s pre-coronavirus results: A year ago, the bank posted $ 6.2 billion in second quarter profit. 

Wells Fargo is also struggling to adjust to a lower interest rate environment. The bank’s net interest margin, a key measure of a bank’s profitability, plunged by 33 basis points from the prior quarter to 2.25%, below the 2.33% estimate of analysts surveyed by FactSet. 

The bank is also hamstrung by its structure: Unlike JPMorgan Chase or Citigroup, Wells Fargo lacks a sizable Wall Street trading division, and that business has been on fire this year amid surging volatility and unprecedented Fed support. Record trading results helped JPMorgan beat expectations for the quarter. 

In part because of the Fed restriction, Wells Fargo has also pulled back from swaths of the mortgage and auto market, particularly in riskier products like jumbo home loans.

While bank stocks have rebounded from their March lows, they have underperformed the broader indexes, which have been buoyed by the roaring technology sector.

One factor keeping bank stocks down: Low interest rates have pressured net interest margin, a key measure of profitability in the banking sector. The industry’s loan books have also begun to shrink, driven in part by lower credit card usage and the fear of rising defaults

Correction: The initial headline misstated the amount of the bank’s dividend cut. 

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