(Reuters) – Wells Fargo & Co fell short of Wall Street estimates for third-quarter profit on Wednesday as the bank clocked nearly $1 billion in expenses tied to a years-long sales scandal, while near-zero interest rates hurt its bottom line.
Chief Executive Officer Charlie Scharf, who marks one year at Wells Fargo this month, has made cost cuts a cornerstone of his plan to turn the scandal-plagued bank around.
Over the long-term he said annual expenses can be $10 billion dollars lower, but pandemic-related costs like cleaning fees for enhanced technology systems have so far kept the bank from making meaningful progress in the short term.
“Strong mortgage banking fees, higher equity markets, and declining sequential charge-offs positively impacted our results, while historically low interest rates reduced our net interest income and our expenses continued to remain elevated,” Scharf said.
Wells Fargo said its pre-tax results were hurt by $961 million of customer remediation accruals, indicating that the bank was still feeling the burn from its sales practice scandal.
The lender has faced severe regulatory scrutiny since the scandal erupted in 2016 when the bank disclosed it had opened millions of bogus accounts for customers, costing the company billions in fines.
The lender also recorded $718 million in restructuring charges, mainly for severance costs.
Wells Fargo had launched a broad cost-cutting drive in July after it posted its first quarterly loss since 2008 and slashed its dividend to preserve capital.
Wells Fargo did offer some good news. Allowance for credit losses for loans was $20.5 billion, flat compared with the previous quarter.
“There is still a lot of work to be done at Wells, but we were encouraged that the company returned to profitability this quarter … we believe reserve builds will take a breather and be less of a headwind for earnings going forward,” Edward Jones analyst Kyle Sanders said.
Scharf added that trajectory of the economic recovery in the United States remains unclear as the negative impact of the COVID-19 pandemic continues and further fiscal stimulus is uncertain.
Shares of the bank were down 2% at $24.28 in early trade.
Mounting costs, however, do not help as the banking industry deals with near-zero interest rates and slower loan growth.
Net-interest income at the fourth-largest U.S. bank was $9.4 billion, down $512 million from the second quarter, as its loan book shrank 2%. Total revenue fell 14%.
Because Wells does not have a large capital markets business like JPMorgan Chase or Bank of America Corp, it has fewer ways to cushion declines in revenue from low interest rates.
Total period-end loans fell nearly 4% to $920.1 billion, hurt by a $30 billion fall in commercial loans, a bigger slump than expected, Jefferies analysts said.
“In conjunction with historically low interest rates, the Fed’s asset cap is making an already challenging environment even more difficult for Wells to grow revenue,” Sanders said.
The U.S. Federal Reserve placed restriction’s on Wells’ balance sheet as punishment for the sales abuses, to be lifted only when the management team can prove they have sufficiently improved risk management and controls.
Wells Fargo posted net income applicable to common stock of $1.72 billion, or 42 cents per share, for the quarter ended Sept. 30, compared with $4.04 billion, or 92 cents a year earlier.
Analysts expected a profit of 45 cents, according to Refinitiv data.
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