Falling Rates, $1.6 Billion Charge Weigh on Wells Fargo Profit
October 15 2019 - 2:09PM
Dow Jones News
By Rachel Louise Ensign
Wells Fargo & Co. said Tuesday that third-quarter profit
fell as lower interest rates hit the bank's lending profits.
Quarterly profit at the San Francisco-based bank was $4.61
billion, compared with $6.01 billion in the year-ago period.
Per-share earnings were 92 cents. Analysts polled by FactSet had
expected $1.24 a share.
Third-quarter revenue came in at $22 billion, up from $21.94
billion a year ago. Analysts had expected $21.09 billion.
The lender also took a financial hit related to the fake-account
scandal that has dogged Wells Fargo since 2016. The company booked
a $1.6 billion charge for legal costs related to its long-running
sales-practices problems, but also had a $1.1 billion gain related
to the sale of a business.
The bank's 2016 fake-account issue badly damaged Wells Fargo's
reputation and led to a morass of regulatory problems. The bank
announced last month after a six-month search that it would hire
Bank of New York Mellon Corp. CEO Charles Scharf as chief
executive. He starts next week but already has started briefings
with the current management team, Chief Financial Officer John
Shrewsberry said.
Mr. Shrewsberry said on a Tuesday call with analysts that he
expects the new CEO to conduct a "complete strategic review" of the
bank's businesses. Mr. Scharf also will be tasked with restoring
the bank's battered reputation and improving its standing with
regulators.
The bank also must contend with falling interest rates, which
hurt profits. The Federal Reserve cut rates twice in the third
quarter.
At Wells Fargo, that meant the yield the bank earned on assets
such as loans dropped to 3.76% from 3.94% in the prior quarter,
while the rate the bank paid on interest-bearing liabilities
including customer deposits dropped to 1.46% from 1.50%. Taken
together, that pushed the bank's net interest margin to 2.66% from
2.82% in the previous quarter.
Wells Fargo's net interest income fell 8% in the third quarter
from a year earlier.
The bank's key business lines have struggled since the scandal.
What was once an aggressive rapidly growing lender whose profit
towered above those of rivals has become a firm with sluggish
revenue that is leaning heavily on cost cuts. Those trends
continued in the third quarter, when the firm's return on equity
stood at 9%.
Revenue fell year over year in consumer banking and wholesale
banking. It rose in the bank's wealth unit, but only due to the
gain on the sale of a retirement and trust business.
Income from mortgage banking fell even though lower rates meant
the bank originated more home loans.
The litigation costs also helped push expenses up 10% in the
third quarter from a year earlier despite cost-cutting goals. Wells
Fargo also paid out more in salary and commission.
Write to Rachel Louise Ensign at rachel.ensign@wsj.com
(END) Dow Jones Newswires
October 15, 2019 13:54 ET (17:54 GMT)
Copyright (c) 2019 Dow Jones & Company, Inc.
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