Wells Fargo Profit Rises, Helped by Tax Law -- Update

By Peter Rudegeair and Emily GlazerFeaturesDow Jones Newswires

Wells Fargo & Co. said its fourth-quarter profit rose as one of the nation's largest banks continues to seek growth while trying to move past its regulatory problems.

Shares fell 1.1% to $62.32 in premarket trading.

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The bank reported a profit of $6.15 billion, or $1.16 a share, above the average analyst estimate on Thomson Reuters of $1.07 a share.

Excluding one-time impacts related to the tax law passed late last year, the sale of an insurance business and a large legal reserve, the profit was 97 cents a share, slightly above the 96 cents in per-share earnings that the bank reported in last year's fourth quarter.

Wells Fargo is somewhat unique among big banks in that the tax law caused it to record one-time gains to profits. Most other big banks are expected to post one-time charges.

This is because Wells Fargo has a net deferred tax liability -- it was about $7 billion at the end of 2016 -- rather than a deferred tax asset. Because of the fall in the U.S. corporate tax rate, other banks will likely have to write down the value of some of their deferred tax assets. Wells Fargo, however, wrote down part of its tax liability -- taxes payable in the future -- which resulted in a gain that boosts reported results.

Investors are expected to look past such one-time changes, however. For Wells Fargo, led by Chief Executive Timothy Sloan, the more immediate concerns are around growth and costs.

Wells Fargo had been one of the most consistent big banks at growing earnings and revenue. But its shares have struggled since the bank in September 2016 agreed to a $185 million settlement over opening as many as 3.5 million accounts with fictitious or unauthorized information.

Since then, the bank has disclosed consumer-lending problems around auto insurance charges and mortgage fees that regulators are probing. Wells Fargo has said it plans to refund more than $100 million to consumers.

Wells Fargo also continues to face a spate of state and federal investigations that the bank has said it is cooperating with.

Investors have so far given Mr. Sloan time to clean up the problems, although the stock has underperformed big rivals over the past year.

Big banks overall are expected to report a slight uptick in loan growth after one of the worst years for business lending since the financial crisis. And while interest rates have been rising of late, they remain at historically low levels. That leads to an environment in which Wells Fargo and its peers don't earn as much money by lending out their vast deposits.

During a November investor presentation, finance chief John Shrewsberry said he's seeing more large corporate deals because organic growth is harder. In the middle market, though, there is less demand because Mr. Shrewsberry said companies are "financing whatever their growth needs are through cash flow that they're organically generating."

Overall revenue rose 2% to $22.1 billion.

Costs at Wells Fargo increased 27% to $16.8 billion from $13.22 billion in the fourth quarter of 2016 and included litigation-related charges of $3.25 billion related to the sales-practice scandal and other matters.

Expenses as a share of revenue in the fourth quarter was 76.2%, well above the target of 60% to 61% set at an investor presentation in May. The bank has operated well above its so-called efficiency ratio of 55% to 59%, hitting an all-time high of 65.5% last quarter and topping 59% for the past five quarters.

Write to Peter Rudegeair at Peter.Rudegeair@wsj.com and Emily Glazer at emily.glazer@wsj.com

(END) Dow Jones Newswires

January 12, 2018 08:44 ET (13:44 GMT)