WFC Wells Fargo and Company

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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