Settlements Crimp Wells Fargo's Profit -- WSJ
July 14 2018 - 3:02AM
Dow Jones News
Consumer banking also showed slack as quarterly earnings fell
11% to $5.19 billion
By Peter Rudegeair
This article is being republished as part of our daily
reproduction of WSJ.com articles that also appeared in the U.S.
print edition of The Wall Street Journal (July 14, 2018).
Wells Fargo & Co. said its second-quarter profit fell 11%
due in part to escalating clean-up costs for past misdeeds and
weakness in several of its main businesses.
The San Francisco-based bank reported a profit of $5.19 billion,
or $0.98 a share. That compares with a profit of $5.86 billion, or
$1.08 a share, in the same period of 2017. Analysts polled by
Thomson Reuters had expected earnings of $1.12 a share.
Shares fell more than 1% in afternoon trading.
Second-quarter results were cluttered by nearly $2 billion in
one-time items, most of which detracted from the bank's
performance. The largest was a $619 million charge the bank took to
refund customers it previously overcharged in its foreign-exchange,
wealth-management and auto- and mortgage-lending units.
The fallout from Wells Fargo's regulatory woes has been a drag
on earnings for nearly two years. Three months ago, the bank
adjusted first-quarter earnings downward by $800 million after
reaching a $1 billion settlement over claims it improperly charged
mortgage and auto-loan customers.
"We have to improve how we manage other risks," CEO Timothy
Sloan said on a conference call with analysts. Since last year,
Wells Fargo has added more than 2,000 employees to its
risk-management team, executives said Friday.
Wells Fargo also set aside an additional $481 million for tax
payments in the wake of a U.S. Supreme Court decision from last
month that primarily dealt taxes owed by online retailers. Finance
chief John Shrewsberry said on a conference call with journalists
that legal entities affiliated with Wells Fargo that hold loans it
made could now be subject to income taxes if they don't have a
physical presence in certain U.S. states.
Behind the noise, there were signs of slack in Wells Fargo's
consumer-banking group. Wells Fargo's mortgage business earned $770
million in fees in the second quarter, down one-third from the
$1.15 billion it earned in the same period a year ago. The bank's
mortgage volume was down 11% after higher rates led to a drop-off
in refinancing activity.
Consumer-loan balances fell 2.3% to $441.2 billion due to
contractions in auto and home-equity portfolios. Wells Fargo also
sold during the quarter a $1.3 billion portfolio of mortgages it
had inherited from its 2008 purchase of Wachovia Corp., resulting
in a $479 million gain. Commercial-loan balances declined slightly
to $503.1 billion, largely due to drops in commercial real-estate
balances.
"Demand is good, but I wouldn't describe it as great," Mr. Sloan
said on the conference call. Wells Fargo's commercial customers
have
Despite the drop-off in loans, Wells Fargo reported a boost in
the income and profitability of its lending activities. Its net
interest margin, a measure of how profitably it can lend out its
customers' deposits, rose to 2.93% from 2.84% at the end of March
and 2.90% in the second quarter a year ago.
Wells Fargo is constrained in how many loans and assets it can
add to its balance sheet under a consent decree it reached with the
Federal Reserve in February. Executives said Friday that the asset
cap hasn't had a big impact on its growth plan so far.
Overall expenses increased 3.3% to $13.98 billion from $13.54
billion in the second quarter of 2017. Expenses as a share of
revenue in the second quarter was 64.9%, above the target of 60% to
61% set at an investor presentation in May 2017.
Revenues fell 3.1% to $21.55 billion.
Wells Fargo had been one of the most consistent big banks at
growing earnings and revenue. But its shares have continued to
underperform big-bank peers since the lender's sales-practices
scandal erupted in September 2016. Since the start of the year,
shares are down nearly 9% while the KBW index of bank stocks is
down only 2%.
--Emily Glazer contributed to this article.
Write to Peter Rudegeair at Peter.Rudegeair@wsj.com
(END) Dow Jones Newswires
July 14, 2018 02:47 ET (06:47 GMT)
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