By Emily Glazer and Rachel Louise Ensign
Wells Fargo & Co. and Bank of America Corp. reported
earnings Friday that benefited from low unemployment and gradually
rising interest rates.
But their performance diverged from there, marking the strongest
evidence yet that the two giant consumer lenders have changed
places, with Bank of America emerging as a budding investor darling
and Wells Fargo taking the role of problem child following a series
of missteps.
Wells Fargo said Friday that third-quarter profit tumbled 19%
from a year ago, due to continued fallout from its sales-practice
scandal and fresh legal issues. The San Francisco bank said revenue
and profit both fell from a year earlier, while its loan portfolio
shrank for a third consecutive quarter. Wells Fargo continued to
struggle with higher expenses in the wake of last year's
sales-practices scandal and a newly disclosed $1 billion litigation
charge tied to investigations into crisis-era mortgage-market
practices.
Investors pushed Wells Fargo shares 3% lower.
Bank of America, on the other hand, is putting once-intractable
problems behind it. The lender reported its highest quarterly
profit in six years. The bank's revenue rose, as it did at peers
J.P. Morgan Chase & Co. and Citigroup Inc. earlier in the week.
Even a decline in Bank of America's trading revenue didn't dent
overall results much, as gains in interest income and continued
cost-cutting helped offset the weakness.
Wells Fargo, a former investor favorite that once surpassed J.P.
Morgan as the most valuable U.S. bank by market capitalization, is
now flirting with the prospect of slipping behind Bank of America
to the number-three ranking on this basis.
While Wells Fargo by some measures remains the more profitable
bank, the two lenders' revenues are now about equal, with Wells
Fargo's roughly $87 million advantage down from nearly $900 million
in the second quarter of 2016 before the sales problems
emerged.
Led by Chief Executive Timothy Sloan, Wells Fargo reported that
net income during the quarter slipped below $5 billion for the
first time in five years, due in large part to the $1 billion it
accrued for a previously disclosed mortgage probe over residential
mortgage-backed securities. The bank is likely to settle with the
Justice Department in coming months, finance chief John Shrewsberry
said in an interview.
While Wells Fargo suffered a rough quarter, shareholder Hank
Smith said he is optimistic about the banking sector overall. That,
he said, is because of economic growth, slowly rising interest
rates and the expectation of less onerous regulations under the
Trump administration.
"While the quarter was a disappointing, it wasn't a dramatic
disappointment," said Mr. Smith, co-chief investment officer of the
Haverford Trust Co., which owns 2.7 million Wells Fargo shares.
The biggest reason for the shifting fortunes of the two banks is
the declining number of regulatory issues at Bank of America and
the increasing tally at Wells Fargo. As recently as 2014, Bank of
America's results were dogged by tens of billions of dollars in
penalties over financial-crisis era issues. Since then, the
company's legal problems have eased and it has made a concerted
effort to cut costs and focus on safer businesses like lending to
consumers with good credit.
Wells Fargo didn't face as many regulatory fines until
cross-selling abuses by branch staff erupted in September 2016,
with employees creating potentially 3.5 million fake accounts. The
bank fired 5,300 employees over five years related to the sales
problems.
Two months after the bank settled that case, Donald Trump's
election as president raised the prospect of faster economic growth
and higher interest rates, a combination that brightened the
prospects for many banks, but especially Bank of America given its
large mortgage securities portfolio.
The result is that Bank of America shares have soared more than
62% over the last year, including a 1.9% rise in response to
Friday's earnings report. That move over the past year is the
biggest gain among the six big U.S. banks, four of whom reported
earnings this past week. The last two, Morgan Stanley and Goldman
Sachs Group Inc., are slated to report results Tuesday.
Wells Fargo posted the worst performance over the period, with a
19% gain.
Bank of America received an additional boost when Warren
Buffett, whose Berkshire Hathaway Inc. is the largest shareholder
at both lenders, discussed the banks in a late-August television
interview. He said both were "terrific" but that Wells Fargo likely
had more troubles ahead: "What you find is there's never just one
cockroach in the kitchen."
He has praised CEO Brian Moynihan's leadership and said he plans
to be a Bank of America shareholder for a long time.
Bank of America's third-quarter profit rose because the bank
continued to cut costs and got a lift in lending profits from
higher interest rates. The results put the bank close to its
long-held profitability goals.
Costs at Wells Fargo, on the other hand, jumped 8% to $14.35
billion, and Mr. Sloan said they are likely to remain heightened
through year-end 2018. The bank also raised the target for its
so-called efficiency ratio because of lower-than-expected asset
growth and higher-than-expected expenses, especially related to
cyber, regulatory initiatives and data monitoring.
The $1 billion litigation charge at Wells Fargo also cut into
its community banking unit results. This is one of the biggest
parts of the bank, and it also suffered from weak mortgage results
and more conservative auto lending.
Write to Emily Glazer at emily.glazer@wsj.com and Rachel Louise
Ensign at rachel.ensign@wsj.com
(END) Dow Jones Newswires
October 13, 2017 16:40 ET (20:40 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
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