Wells Fargo Posts Weaker Earnings -- 2nd Update
October 13 2017 - 9:35AM
Dow Jones News
By Emily Glazer
Wells Fargo & Co. said third-quarter profit and revenue fell
as the nation's third-largest bank by assets was hurt by a coming
legal settlement and continues to struggle with fallout from last
year's sales-practice scandal.
Following the results, shares fell 2.4% to $53.87 in premarket
trading.
Wells Fargo reported a profit of $4.57 billion, or 84 cents a
share, which included a charge of $1 billion, or 20 cents a share,
for previously disclosed, crisis-era mortgage-related regulatory
investigations. The bank's earnings compared with $5.64 billion, or
$1.03 a share, in the year-ago period. Analysts polled by Thomson
Reuters had expected earnings of $1.03 a share.
The legal settlement that may soon come out of the years-old
mortgage probe doesn't explain a weaker-than-expected revenue
figure from the bank. Wells Fargo's quarterly revenue fell to
$21.93 billion from $22.33 billion a year earlier. Analysts had
expected $22.40 billion.
Wells Fargo was the only big U.S. bank so far to report falling
revenue and to miss analysts' target on that metric.
The bank, led by Chief Executive Timothy Sloan, had been one of
the more consistent big banks at growing earnings and revenue.
Shares, though, dropped last year after the bank agreed to a $185
million settlement over opening accounts with fictitious or
unauthorized information. It recently updated the number of
potentially affected accounts to 3.5 million.
Those issues are on top of consumer-lending problems around auto
insurance charges and mortgage fees that regulators are probing.
Mr. Sloan testified in a congressional hearing last week on those
matters. Wells Fargo also continues to face a spate of state and
federal investigations that the bank has said it is cooperating
with.
Investors so far have given Mr. Sloan time to clean up the
problems, despite the fact the bank's shares have badly
underperformed big rivals over the past year. In May, Wells also
announced an additional $2 billion in cost cuts by the end of
2018.
Though the bank's shares have bounced back following the
election, rising about 21% through Thursday, they have lagged
behind the 32% jump in the KBW Nasdaq Bank Index over the same
period. The bank's shares are about flat since the beginning of the
year.
The sales scandal has boosted expenses, which are likely to
remain high for some time. Making matters worse, this is happening
as interest rates remain at relatively low levels, despite a recent
uptick. The result of this combination: Wells Fargo's return on
equity continued to grind lower in the third quarter, at 9.06%,
hitting its lowest level in years.
Overall profits at Wells Fargo's community banking division,
which includes the unit responsible for the questionable sales
tactics over at least the past several years -- and the more recent
auto insurance and mortgage problems -- were $2.23 billion, a 31%
slump from the $3.23 billion it earned in the third quarter of
2016. The bank said the unit's profit included the crisis-era,
mortgage-related litigation accrual of $1 billion.
Though low rates had been a boon for certain aspects of home
lending, the all-important refinancing market has largely slowed
down. Wells Fargo's mortgage business, the largest in the U.S. by
volume, earned $1.05 billion in fees in the third quarter, down 37%
from the $1.67 billion it earned in the year-ago period. The bank
extended $59 billion in home loans between the end of June and the
end of September, compared with $70 billion in the third quarter of
2016 and $56 billion in the second quarter of 2017.
Costs at Wells Fargo increased 8% to $14.35 billion in the third
quarter of 2016. Expenses as a share of revenue in the third
quarter was 65.5% because of the $1 billion litigation accrual.
That is well above the new target of 60% to 61% set at an investor
presentation in May.
Mr. Sloan said in mid-September that third-party expense,
including that related to the sales scandal, is expected to remain
high in the third quarter before an anticipated decline in the
fourth quarter.
Total loans at the end of the third quarter for Wells Fargo
tallied $951.87 billion, a decrease from $961.3 billion in the same
period a year ago. Commercial loans, which make up one of the
largest part of the bank's total portfolio, were $500.15 billion,
up about 1% from a year ago.
Big banks' loan growth was expected to soften, especially in
commercial and industrial lending, based on Federal Reserve loan
data. Overall, rates also remain relatively low, an environment in
which Wells Fargo and its peers don't earn as much money by lending
out their vast deposits.
Despite overall loan growth, Wells Fargo reported that the
profitability of its lending activities continued to be challenged.
Its net interest margin, a measure of how profitably it can lend
out its customers' deposits, fell to 2.87% from 2.90% at the end of
June and 2.82% in the year-ago third quarter.
Write to Emily Glazer at emily.glazer@wsj.com
(END) Dow Jones Newswires
October 13, 2017 09:20 ET (13:20 GMT)
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