Wells Fargo Posts Weaker Earnings -- 3rd Update

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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.

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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

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)