Wells Fargo Posts Weaker Earnings -- 3rd Update
October 13 2017 - 3:00PM
Dow Jones News
By Emily Glazer
Wells Fargo & Co. delivered another tough message to
investors Friday as its earnings results fell far short of
expectations.
The bank said third-quarter profit and revenue dropped as the
nation's third-largest bank by assets was hurt by a coming legal
settlement and continued struggles with fallout from last year's
sales-practice scandal.
Following the results, shares fell 3.4% in afternoon
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,
related to previously disclosed regulatory investigations into
crisis-era mortgage practices. The bank's earnings were down from
the $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, which fell to $21.93 billion from $22.33 billion a year
earlier. Analysts had expected $22.40 billion.
Wells Fargo is the only big U.S. bank so far to report falling
revenue and to miss analysts' target on that metric. Chief
Financial Officer John Shrewsberry said on a call with analysts
that revenue declined because of lower noninterest income largely
rooted in falling mortgage results.
Several analysts pressed executives about how the bank can
resume stronger growth, given various regulatory issues. Bank
executives responded that Wells Fargo's risk discipline has
affected growth, which will help over the longer term.
Wells Fargo, 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. Shrewsberry said in an interview that a Justice investigation
into its sales scandal hasn't "reached the point of becoming a
financial matter."
On Friday, Mr. Sloan didn't give a specific answer on when the
firm's reviews of past business problems will wrap up. "It's a
mistake to put a stake in the ground and say everything has to be
done by a certain date because then what happens is people might
rush to get to the answer," he said.
The Wall Street Journal previously reported that the bank is
negotiating with the Justice Department over a settlement related
to crisis-era residential mortgage-backed securities for more than
$1 billion. Other large banks have paid out billions in recent
years over similar settlements.
Mr. Shrewsberry said in an interview that the bank is "right in
the middle" of negotiations with the Justice Department and "over
the coming months, couple quarters we should probably be through
it."
Some shareholders' patience is wearing thin. Hank Smith,
co-chief investment officer The Haverford Trust Co., said the
Radnor, Pa.-based investment firm is debating whether to reduce its
roughly 2.7 million-share position.
"We still believe they're going to get through these
issues...but it's like the cockroaches won't go away," he said.
The quarter's litigation charge also coincided with weak results
elsewhere. 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 and the more recent auto insurance and mortgage problems,
were $2.23 billion, a 31% slump from the $3.23 billion in the third
quarter of 2016. The bank said the unit's profit included the
crisis-era, mortgage-related litigation accrual.
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's auto lending portfolio also continued to suffer, with
originations slumping 47% to $4.3 billion versus the year-earlier
period.
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%, again driven by the $1 billion litigation
accrual. Mr. Shrewsberry said that ratio will remain heightened,
around 61%. He added that the bank is committed to improving the
ratio and still plans to achieve its target of $4 billion in
expense reductions by end of 2019.
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.
Write to Emily Glazer at emily.glazer@wsj.com
(END) Dow Jones Newswires
October 13, 2017 14:45 ET (18:45 GMT)
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