Wells Fargo Results Disappoint as Regulatory Issues Persist -- Update
14 April 2018 - 3:08AM
Dow Jones News
By Emily Glazer
Wells Fargo & Co. said its first-quarter profit rose but
that it may need to restate results given a looming regulatory
settlement, a further sign the bank is struggling to move past a
spate of investigations across its businesses.
The bank said Friday that the Consumer Financial Protection
Bureau and Office of the Comptroller of the Currency offered to
resolve investigations related to the bank's risk management for $1
billion.
The disclosure is the latest blow to Wells Fargo, which in
February was slapped by the Federal Reserve with an unprecedented
sanction for failing to have proper risk controls. The Fed, in an
enforcement action, barred the bank from growing past the $1.95
trillion in assets it had at the end of 2017.
Finance Chief John Shrewsberry said Friday that the Fed's asset
cap is likely to increase in future quarters. Yet Wells Fargo's
latest results weren't enough to dispel investors' fears about the
bank's ability to grow, as well as contain costs.
Wells Fargo reported profit of $5.94 billion, or $1.12 a share,
topping analyst expectations of $1.06 a share. But revenues fell to
$21.9 billion, down nearly 2% from a year earlier. And total loans
of $947.3 billion declined compared with the prior quarter and from
a year earlier.
The bank's return on equity was 12.37%, down from the prior
quarter and notching only a slight improvement from a year ago.
That was a marked contrast to improvements at both JPMorgan Chase
& Co. and Citigroup Inc., which also reported results
Friday.
In response, Wells Fargo's stock fell around 3% to $51.12 in
midday trading Friday. The noise around regulatory issues masked
"fundamental weakness" in Wells Fargo's underlying business,
Raymond James analyst David J. Long wrote in a research note.
Wells Fargo, run since late 2016 by Chief Executive Timothy
Sloan, had previously been one of the most consistent big banks at
growing earnings and revenue. But its shares more recently have
underperformed peers.
In September 2016, the San Francisco-based bank 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 wealth-management problems
and consumer-lending issues around improper auto-lending charges
and mortgage fees, all of which regulators are probing. Wells Fargo
has said it plans to refund around $145 million to hundreds of
thousands of consumers related to the consumer-lending
problems.
The potential OCC and CFPB settlement that Wells Fargo
referenced Friday is related to those problems. The bank said it is
"unable to predict the final resolution" of that matter and "cannot
reasonably estimate our related loss contingency."
Analysts pressed for more details on the impact of the looming
settlement. Mr. Sloan said on the bank's earnings call that it may
have more updates in its quarterly filing, which typically lands
several weeks after earnings. But he wouldn't say whether Wells
Fargo had included any provisioning for the potential settlement in
its first-quarter results.
Mr. Sloan added that it would take more time before the bank can
move past its problems. "In terms of declaring victory and walking
ahead, we're not quite there yet," he said.
One area where that remains apparent: expenses, which remain
high in part because of the bank's need to address regulatory and
business issues. Wells Fargo said noninterest expense rose 3% from
a year earlier to $14.2 billion in the quarter.
Expenses as a share of revenue in the first quarter were 64.9%,
above the target of 60% to 61% set at an investor presentation in
May 2017. Mr. Shrewsberry said the bank's so-called efficiency
ratio will likely stay above 59% for the rest of 2018.
Meanwhile, the bank has yet to see a big benefit from rising
interest rates. Net interest income declined 1% from a year
earlier, although it rose 3% after taking into account provisions
for credit losses.
Wells Fargo's net-interest margin, a measure of the profit the
bank makes by borrowing money from depositors and lending it out,
was 2.84% in the first quarter. That was unchanged from the prior
quarter and down from 2.87% a year ago.
Profits at the community banking division, which includes the
unit responsible for the questionable sales tactics over the past
several years, were $2.71 billion, down nearly 4% from a year
ago.
Though a period of low interest rates had been a boon for
certain aspects of home lending, the all-important refinancing
market has largely slowed of late. Wells Fargo's mortgage business,
one of the largest in the U.S. by volume, earned $934 million in
fees in the first quarter. That was down 24% from the $1.23 billion
it earned in a year ago.
Write to Emily Glazer at emily.glazer@wsj.com
(END) Dow Jones Newswires
April 13, 2018 12:53 ET (16:53 GMT)
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