WFC Wells Fargo and Company

By Emily Glazer 

Wells Fargo & Co. said its first-quarter profit rose but that it may need to restate results given a looming regulatory settlement, a further sign the bank is struggling to move past a spate of investigations across its businesses.

The bank said Friday that the Consumer Financial Protection Bureau and Office of the Comptroller of the Currency offered to resolve investigations related to the bank's risk management for $1 billion.

The disclosure is the latest blow to Wells Fargo, which in February was slapped by the Federal Reserve with an unprecedented sanction for failing to have proper risk controls. The Fed, in an enforcement action, barred the bank from growing past the $1.95 trillion in assets it had at the end of 2017.

Finance Chief John Shrewsberry said Friday that the Fed's asset cap is likely to increase in future quarters. Yet Wells Fargo's latest results weren't enough to dispel investors' fears about the bank's ability to grow, as well as contain costs.

Wells Fargo reported profit of $5.94 billion, or $1.12 a share, topping analyst expectations of $1.06 a share. But revenues fell to $21.9 billion, down nearly 2% from a year earlier. And total loans of $947.3 billion declined compared with the prior quarter and from a year earlier.

The bank's return on equity was 12.37%, down from the prior quarter and notching only a slight improvement from a year ago. That was a marked contrast to improvements at both JPMorgan Chase & Co. and Citigroup Inc., which also reported results Friday.

In response, Wells Fargo's stock fell around 3% to $51.12 in midday trading Friday. The noise around regulatory issues masked "fundamental weakness" in Wells Fargo's underlying business, Raymond James analyst David J. Long wrote in a research note.

Wells Fargo, run since late 2016 by Chief Executive Timothy Sloan, had previously been one of the most consistent big banks at growing earnings and revenue. But its shares more recently have underperformed peers.

In September 2016, the San Francisco-based bank agreed to a $185 million settlement over opening as many as 3.5 million accounts with fictitious or unauthorized information.

Since then, the bank has disclosed wealth-management problems and consumer-lending issues around improper auto-lending charges and mortgage fees, all of which regulators are probing. Wells Fargo has said it plans to refund around $145 million to hundreds of thousands of consumers related to the consumer-lending problems.

The potential OCC and CFPB settlement that Wells Fargo referenced Friday is related to those problems. The bank said it is "unable to predict the final resolution" of that matter and "cannot reasonably estimate our related loss contingency."

Analysts pressed for more details on the impact of the looming settlement. Mr. Sloan said on the bank's earnings call that it may have more updates in its quarterly filing, which typically lands several weeks after earnings. But he wouldn't say whether Wells Fargo had included any provisioning for the potential settlement in its first-quarter results.

Mr. Sloan added that it would take more time before the bank can move past its problems. "In terms of declaring victory and walking ahead, we're not quite there yet," he said.

One area where that remains apparent: expenses, which remain high in part because of the bank's need to address regulatory and business issues. Wells Fargo said noninterest expense rose 3% from a year earlier to $14.2 billion in the quarter.

Expenses as a share of revenue in the first quarter were 64.9%, above the target of 60% to 61% set at an investor presentation in May 2017. Mr. Shrewsberry said the bank's so-called efficiency ratio will likely stay above 59% for the rest of 2018.

Meanwhile, the bank has yet to see a big benefit from rising interest rates. Net interest income declined 1% from a year earlier, although it rose 3% after taking into account provisions for credit losses.

Wells Fargo's net-interest margin, a measure of the profit the bank makes by borrowing money from depositors and lending it out, was 2.84% in the first quarter. That was unchanged from the prior quarter and down from 2.87% a year ago.

Profits at the community banking division, which includes the unit responsible for the questionable sales tactics over the past several years, were $2.71 billion, down nearly 4% from a year ago.

Though a period of low interest rates had been a boon for certain aspects of home lending, the all-important refinancing market has largely slowed of late. Wells Fargo's mortgage business, one of the largest in the U.S. by volume, earned $934 million in fees in the first quarter. That was down 24% from the $1.23 billion it earned in a year ago.

Write to Emily Glazer at emily.glazer@wsj.com

(END) Dow Jones Newswires

April 13, 2018 12:53 ET (16:53 GMT)

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