Wells Fargo takes $1.6B legal charge, dragging 3Q earnings down

Expense for litigation tied to scandals in Well's retail bank, cuts earnings by 35 cents a share

Oct 15, 2019 @ 10:53 am

By Bloomberg News

Wells Fargo & Co. investors got a reminder that the bank isn't past its problems even as it seeks a fresh start under a new leader.

The lender took a $1.6 billion expense for litigation tied to scandals in its retail bank, dragging down third-quarter earnings by 35 cents a share. Net income fell 23% to $4.61 billion, or 92 cents a share, the San Francisco-based firm said Tuesday in a statement.

Wells Fargo's longer-term strategy has been in flux since Tim Sloan stepped down as chief executive in March, bowing to outside pressures following a series of scandals at the bank. The company said last month that Charlie Scharf, 54, previously head of Bank of New York Mellon Corp., will take over from interim CEO Allen Parker on Oct. 21.

Mr. Scharf will be charged with mending ties in Washington, where Wells Fargo's problems are hardly over: The bank still faces several investigations and outstanding consent orders, including a growth restriction imposed by the Federal Reserve.

The $1.6 billion litigation accrual "indicates that things are still dragging on in terms of sales practices," Kyle Sanders, an analyst at Edward Jones, said in an interview. "Everybody's waiting for Charlie to come in."

Outside of the legal charge, the bank's results were pulled down by lower-than-expected net interest income as the lender felt the effects of Fed rate cuts. NII, the difference between what the bank charges borrowers and pays to customers with deposits, fell 8% to $11.6 billion. Analysts predicted a 7.1% drop.

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Revenue was little changed at $22 billion, exceeding analysts' estimates of $21.2 billion.

Last month, Wells Fargo lowered its 2019 forecast for NII — the bank's biggest revenue source — for the second time this year, saying it will probably be down 6% from 2018. Costs are likely to remain elevated through next year as the lender works through legal and regulatory issues, executives have said.

Wells Fargo, the country's biggest home lender, generated $608 million from new mortgages but took a loss on servicing rights as homeowners refinanced or paid off loans early. The Mortgage Bankers Association estimated a 21% increase in total originations and 58% jump in refinancings for the third quarter as interest rates dipped.

Shares of Wells Fargo were little changed at $49.32 at 9:32 a.m. in New York. The stock has climbed 6.4% this year, compared with a 15% increase in the 24-company KBW Bank Index.

More about Wells Fargo's third-quarter results:

The bank's efficiency ratio, a measure of profitability, worsened to 69.1% from 62.3% in the second quarter, driven by the legal charge. Sloan had been targeting 55% to 59% in the long term, excluding litigation costs, though Scharf may set a different goal.

Results were helped by the $1.1 billion sale of the institutional retirement and trust business, which boosted earnings by 20 cents a share.

The firm reported some positive indicators that it is moving past its problems. Period-end loans and deposits both increased from a year ago, and the number of consumer checking customers rose for the eighth consecutive quarter.

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