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Low rates, souring energy credits weigh on Wells' earnings

grew loansin the second quarter and executives extolled consumer-driven U.S. economic vitality,but persistently low interest rates cut into the bank's profitability and weaknessamong energy borrowers drove up credit losses.

The SanFrancisco-based banking behemoth, the nation's third-largest by assets, on July15 said its second-quarter top line climbed to $22.16billion from $21.32 billion a year earlier, boosted by nearly 8% loan growth. Butits bottom line contractedamid higher costs and unrelenting pressure on its net interest margin. Itposted second-quarter net income applicable to commonstock of $5.17 billion, or $1.01 per share, down from $5.36 billion, or $1.03 per share, a year earlier.

Its NIMdeclined to 2.86% from 2.90% the previous quarter and from 2.97% a year earlier.During a conference callwith analysts, Wells executives blamed a protracted low-rate environment that theyanticipate will continue through this year. Heading into 2016, banks had lookedfor the Federal Reserve to potentially raise short-term interest rates several timesover the course of the year, given that policymakers had made it clear that suchmoves were on the table. But after a rocky start to the year for markets the centralbank balked, and then in June, policymakers pushed off rate action again after U.K.voters decided to leave the European Union, creating new global economic uncertainty.

Now,short-term rates remain historically low, and in the wake of the U.K. vote, long-termrates declined anew, as well, leaving banks to struggle with a "lower for longerscenario" that "puts pressure on everything we do," as Chairman andCEO John Stumpf told analysts.

So while Wells generated solid loan growth across several productlines, from auto and home loans to credit cards alongside what Stumpf called healthyconsumer confidence and a strengthening housing market — as well as customers movingto take advantage of low rates — such lending was notably less profitable than itlikely would have been in a more normal rate environment.

That, analysts say, is cause for concern, especially since rateconditions are not expected to change soon. "Rates are clearly going to be a chronic issue," Sandler O'Neill & Partners analyst ScottSiefers said in an interview.

At the same time, Wells continues to grapple with oil-and-gasborrowers' inabilityto make loan payments. While oil prices have recovered from the lows of the firstquarter, they remain well below their 2014 highs and are too low for some energycompanies to generate profits.

Wellscharged off $263 million in energy loans in the second quarter; that marked a $59million increase from the previous quarter. Overall, charge-offs totaled $924 million,up from $886 million the previous quarter and up from $650 million a year earlier.

Wells' stock dipped more than 2% inmorning trading after the bank posted earnings. Matthew Shields, a bank stock trader and managing director in HovdeGroup's equity capital markets group, said investors were concerned about both theimpact of interest rates and energy-related losses.

"Worryabout lower for longer, that's spot on,"Shields said in an interview, referringto investors' chief reaction to Wells' results.While most think the bank is large and healthy enough to absorb energy losses withoutmajor complication, the notably higher charge-offs did catch investors' attention."I think that's spookingsome folks."

Siefers also noted thatWells is wrestling with overall cost pressures. Total noninterest expenses rose3% from a year earlier. Executives said they are actively managing costs, but thebank needs to invest in new technology and products, as well as spend, to keep pacewith compliance and risk management expectations.

Wells reported an efficiencyratio of 58.1% for the second quarter, putting it at the higher end of its targetedrange of 55% to 59%. Executives said on the call that, with rates remaining low,they expect the ratio to stay on the high end of the range through the end of thisyear.

"Thereare natural pressures" on expenses, Siefers said. "But I had hoped to seea little more relief on costs in the second quarter."