Wells Fargo's profit flat, costs and mortgages weigh

Wells Fargo & Co posted flat quarterly earnings on Thursday and warned its costs would remain elevated as the fallout from a sales practices scandal continues to impact the third-largest U.S. bank.

Higher personnel costs and legal fees as well as lower mortgage banking revenues kept Wells Fargo's first-quarter net income broadly flat at $5.5 billion and the San Francisco-based bank said expenses as a share of revenues would remain high.

Wells Fargo is trying to put a scandal over the opening of unauthorized accounts behind it and earlier this week said it would claw back an additional $75 million of compensation from the two former executives it blamed most for the debacle.

Known for consistently growing revenues and earnings in the post-crisis era, Wells Fargo has been thrown off course by the sales controversy and in recent quarters has also been disadvantaged by its smaller trading footprint.

Wall Street rivals have bounced back as bond and currency markets roared back to life last year with JPMorgan and Citi each reporting a 17 percent increase in quarterly profit on Thursday, beating analyst expectations.

Wells Fargo's revenues fell about 1 percent to $22 billion and missed the average estimate of $22.32 billion. On a per share basis, profit rose to $1.00 from 99 cents a year earlier, beating the average analyst estimate of 97 cents.

The bank's efficiency ratio, a closely watched number reflecting non-interest expenses as a percentage of revenue, was 62.7 percent, compared with 58.7 percent a year ago and 61.2 percent in the previous quarter, and Wells Fargo said it expected the ratio to "remain elevated."

Noting that the efficiency ratio was outside the normal range, Chief Executive Tim Sloan said during a call with analysts: "I want to make it very clear that operating at this level is not acceptable."

Before the sales scandal, Wells Fargo had consistently targeted an efficiency ratio of 55-59 percent.

The bank's stock was down 1.2 percent in early trading on Thursday. After the close on Wednesday, Berkshire Hathaway Inc, Wells Fargo's largest shareholder, said it withdrew an application to the Federal Reserve to boost its ownership stake above 10 percent, and is instead selling 9 million shares to keep it below that threshold.

MORTGAGES AND COSTS

Higher interest rates helped Wells Fargo earn more from lending with a 5 percent rise to $12.3 billion in its net interest income, an important measure of profitability that shows the difference between a bank's cost of money and how much it receives for the funds.

But higher rates have also put borrowers off refinancing their mortgages, driving a 23 percent drop in Wells Fargo's fee income from mortgages to $1.23 billion.

Mortgage borrowing was also a dark spot in JPMorgan's results, with mortgage fees and loan servicing revenue tumbling 39 percent to $406 million from $667 million.

Wells Fargo is the��largest U.S. residential mortgage lender, having made more than $244 billion worth of loans in 2016, according to trade publication Inside Mortgage Finance.

Interest rates have had a bigger impact on Wells' consumer business than the accounts scandal but the bank has had a steady decline in the number of consumers opening checking and credit card accounts.

Overall net profit at its retail bank, its biggest profit center, fell 9 percent due to a drop in fee income. Wells' wholesale banking division, which provides loans and other services to corporate clients, reported a 10 percent increase in net profit from a year ago.

Costs at Wells Fargo rose 6 percent compared to the year-ago period as the bank shelled out more for salaries as well as the legal costs related to the scandal.

(Editing by Carmel Crimmins and Meredith Mazzilli)