Dive Brief:

• Wells Fargo CFO John Shrewsberry announced the bank would divert more profits to loan-loss reserves in the second quarter, which caused the bank's stock to drop over 8%, at the Morgan Stanley Virtual U.S. Financials Conference last Wednesday.

• In the second quarter, year-over-year net interest income will drop 11% due to historically low rates, Shrewsberry added. 

• Wells Fargo's profits jumped to $3.8 billion in Q1, from last year’s $845 million, but the diversion of profits to defensive reserves fueled a 90% year-over-year earnings decline, according to Business Insider.

Dive Insight:

Shrewsberry told investors reserves to protect against heightened default risk of default will increase, citing skyrocketing unemployment and dire gross-domestic-product forecasts, Business Insider wrote. 

"The severity of the economic forecast is a big part of it, but we will be providing more in the second quarter to make sure we [have] full coverage for the losses," Shrewsberry said.

Shrewsberry said, due to historically low rates, he predicts net interest income, one of the bank's key revenue streams, to fall 11% in the second quarter. Additionally, deposit costs will likely fall due to low rates, which he said will work towards the bank's benefit later in the year.

Layoffs will be in the cards as Wells Fargo looks to the end of 2020.

"At some point this year,  we will get back to executing on programs designed to get our total expense base, [or] our total headcount, to as lean a state as we can reasonably operate," Shrewsberry said.

He went on to say bank executives are considering more ways to automate the bank's work. Wells CEO Charles Scharf is studying every division, trying to find which ones are "the most efficient and admirable competitors," the Des Moines register reported.

"The playbook is thickening for how to become as efficient as we can be," Shrewsberry said.

Though still making a profit, Wells Fargo's earnings are taking a sizable hit. As businesses shuttered amid the pandemic, and millions of Americans filed for unemployment, the bank set aside billions of dollars to cover loans it’s unsure customers will be able to repay.

In April, Wells Fargo reported a $653 million first-quarter profit, down from $5.86 billion during the same period in 2019.