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Wells Fargo’s Shares Drop Despite Better-Than-Expected Quarter

Wells Fargo & Co posted a better-than-expected quarterly profit as the third-largest U.S. bank by assets benefited from higher interest income and set aside less money to meet future loan losses.

Earlier in the day, JPMorgan Chase and Citigroup also reported stronger-than-expected profits, partly helped by higher interest rates.

Wells Fargo‘s net interest income, a measure that reflects earnings relative to funding costs, rose 6.4% to $12.48 billion.

However, Wells Fargo‘s shares were down 1.8% in premarket trading as total operating revenue of $22.17 billion missed the estimate of $22.47 billion.

The U.S. Federal Reserve raised interest rates for the second time this year in June, and indicated another possible hoist this year.

Net income applicable to common shareholders rose 4.5% to $5.40 billion, or $1.07 per share, in the quarter ended June. 30, beating the average analyst estimate of $1.01, according to Thomson Reuters I/B/E/S.

Wells Fargo set aside $555 million as provisions for loan losses in the quarter, down 48.3%, citing an improvement in its energy loan portfolio.

However, the lender’s mortgage business continued to be a dark spot as home refinancing activity across the banking industry weakened due to higher interest rates.

The largest U.S. residential mortgage lender recorded an 18.8% fall in mortgage banking income to $1.15 billion. JPMorgan, its closest rival in mortgage banking, posted a 41% decline in mortgage fees and loan servicing revenue.

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% to $13.54 billion.

The company doubled its cost-cutting goals in May and plans to reduce costs by $4 billion through the end of 2019.

The bank’s efficiency ratio, which measures expenses as a percentage of revenue, was 61.1%, compared with an estimate of 60.2% from Credit Suisse analyst Susan Katzke.

Wells Fargo has been trying to keep its efficiency ratio in a range of 55% to 59%, and when it soared to 62.7% last quarter, CEO Tim Sloan called it “unacceptable.”

Revenue was flat at $22.17 billion in the quarter.