Wells Fargo & Co. reaped the benefits of higher interest rates in the second quarter, which helped push profit at the nation's third-largest bank up by 4.5%.
The San Francisco-based bank's shares fell 2% in midday trading, however, as stagnant loan growth, weaker revenue in areas like mortgage banking and higher costs overshadowed progress on the bottom line.
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The bank reported a profit of $5.81 billion, or $1.07 a share. That compares with $5.56 billion, or $1.01 a share, in the same period of 2016. Analysts polled by Thomson Reuters had expected earnings of $1.01 a share.
The bank's results included a $186 million tax benefit during the second quarter, most of which was related to a deal it reached in June to sell its commercial insurance business. That boosted Wells Fargo's per-share earnings by 4 cents. Excluding this, the company's earnings would have come in at $1.03.
Net interest income at the bank rose 6.4% to $12.48 billion from the same period last year. Big banks' loan businesses have been helped in recent weeks by higher U.S. interest rates and bond yields.
The bank's net interest margin, a measure of how profitably it can lend out its customers' deposits, rose to 2.9% from 2.86% last June, and its return on equity rose to 11.95% from 11.7%. The bank said it exercised discipline in repricing deposits, which helped them capture more of an increase in loan yields.
The overall size of Wells Fargo's loan book stalled at $957 billion. During the quarter, the bank backed off making certain car loans and commercial real estate loans due to higher risk in those segments, executives said on a conference call with analysts.
Wells Fargo's income from fees fell 7% to $9.69 billion, with several of its businesses facing challenges in the quarter. Mortgage-banking fee income fell 19% due in part to tougher competition, and net gains on the bank's trading activities fell 46% due in part to trading losses.
The bank, led by Chief Executive Timothy Sloan, had been one of the most consistent big banks at growing earnings and revenue. Shares dropped though last year after the bank agreed to a $185 million settlement with two regulators and a city official over opening as many as 2.1 million accounts with fictitious or unauthorized information.
It also continues to face a spate of state and federal investigations that the bank has said it is cooperating with.
While the overall impact of the sales-practices scandal on Wells Fargo's bottom line hasn't yet been dramatic, investors and analysts are pressing the bank to show it can grow. But it has responded that it may take time, and meanwhile in May announced an additional $2 billion in cost cuts by the end of 2018.
Overall revenue rose slightly to $22.17 billion, but fell short of the $22.47 billion expected by analysts.
Costs at Wells Fargo increased 5.2% to $13.54 billion from $12.87 billion in the second quarter of 2016. Expenses as a share of revenue in the second quarter was 61.1%, slightly above the new target of 60% to 61% set at an investor presentation in May. That is also higher than the two-year target the bank set last year of 55% to 59%.
"Operating at this level is just not acceptable," said Mr. Sloan on a conference call with analysts.
The bank's shares bounced back following the election, rising 22%. That compares with a 28% jump by the KBW Nasdaq Bank index of large commercial lenders over the same period.
Write to Peter Rudegeair at Peter.Rudegeair@wsj.com
(END) Dow Jones Newswires
July 14, 2017 12:54 ET (16:54 GMT)