Wells Fargo profit falls in the wake of sales tactics scandal

America’s third-largest bank managed to beat analyst expectations as it reported in the wake of its chief’s departure.

Wells Fargo beat analyst forecasts but its profit fell as it reported results in the wake of a sales tactics scandal. Picture: AFP Photo/Frederic J Brown.

Wells Fargo said its third-quarter profit fell as the nation’s third-largest bank by assets looked to move beyond the public outrage over a sales-tactics scandal that led to the departure of its CEO this week.

The San Francisco-based bank reported a profit of $US5.64 billion, or $US1.03 a share. That compares with $US5.8 billion, or $US1.05 a share, in the same period of 2015. Analysts polled by Thomson Reuters had expected earnings of $US1.01 a share.

Revenue rose to $US22.33 billion. Analysts had expected $US22.21 billion.

Wells Fargo had been one of the most consistent big banks at growing earnings and revenue. But shares have fallen 10 per cent since the bank agreed to a $US185 million settlement with two regulators and a city official over opening as many as 2 million accounts with fictitious or unauthorised information. That drop compares with a 1.4 per cent fall for the KBW Nasdaq Bank index of large commercial lenders over the same period.

The bank has since faced a raft of federal and state investigations that led to Chief Executive John Stumpf being replaced by Timothy Sloan on Wednesday. Mr Stumpf had been grilled at two congressional hearings in September and also agreed to have $US41 million of his compensation clawed back.

The relatively fast-growing lender ended product sales goals within its retail bank earlier this month, also in response to regulatory pressure over aggressive sales tactics. Mr Stumpf said on an internal conference call reviewed by The Wall Street Journal earlier in the week that net new business in the retail bank, a large part of the Main Street lender, “will be down for a while.”

The scandal has boosted expenses, which are likely to remain high for some time. Making matters worse, this is happening as interest rates remain at superlow levels. The result of this combination: Wells Fargo’s return on equity continues to grind lower. In the third quarter it was 11.6 per cent, its lowest level in years.

But the overall impact of the scandal on Wells Fargo’s bottom line hasn’t yet been as dramatic, so far. Since the enforcement action became public in early September, analysts’ average estimate for Wells Fargo’s third-quarter earnings had dropped by only one cent-per-share.

Mr Sloan, who was promoted from the role of chief operating officer, said on the internal conference call reviewed by The Wall Street Journal that although Wells Fargo is still growing new checking accounts, it isn’t as much as a few months ago. The number of customer referrals to various businesses within consumer lending groups is also down, he said on the call.

Overall profits at Wells Fargo’s community banking division, which includes the unit responsible for the questionable sales tactics over at least the past several years, were $US3.23 billion in the third quarter. That was down 9.5 per cent from $US3.56 billion a year earlier.

Wells Fargo’s wholesale banking division, where longtime executive Perry Pelos was recently named to take over for Mr Sloan, recorded profits of $US2.05 billion, up 6 per cent from $US1.93 billion a year ago.

The bank’s wealth and investment management unit posted profits of $US677 million, a 12 per cent increase from $US606 million a year earlier.

While low rates have hurt the bank overall, they have been a boon for certain aspects of home lending. Wells Fargo’s mortgage business, the largest in the US by volume, earned $US1.67 billion in fees in the third quarter, up 5 per cent from $US1.59 billion a year ago. The bank extended $US70 billion in home loans between the end of June and the end of September, compared with $US55 billion in the third quarter of 2015 and $US63 billion in the second quarter of 2016.

Costs increased 3 per cent to $US13.3 billion from $US12.9 billion in the second quarter of 2016. Expenses as a share of revenue in the third quarter were 59.4 per cent, above the 55 per cent-59 per cent range that Wells Fargo targets for its so-called “efficiency ratio.” The bank said it expects the efficiency ratio to “remain at an elevated level.”

Wells Fargo’s loan book continued to expand at a fast pace. Total loans at the end of the third quarter were $US961.3 billion, an increase from $US903.23 billion in the same period a year ago. Commercial and industrial loans, which make up one of the largest part of the bank’s total portfolio, were $US324.02 billion, up 11 per cent from $US292.23 billion in the third quarter of 2015.

Despite the overall loan growth, Wells Fargo reported that the profitability of its lending activities continued to be challenged. Its net interest margin, a measure of how profitably it can lend out its customers’ deposits, fell to 2.82 per cent from 2.86 per cent at the end of June and 2.96 per cent in the third quarter a year ago.

Wells Fargo set aside $US805 million in the third quarter to cover loans that could potentially turn bad in the future. That compares to $US703 million in the third quarter of 2015 and $US1.07 billion in the second quarter of 2016. The bank lost $US805 million to loan defaults, or .33 per cent of its overall portfolio, compared with a 0.31 per cent charge-off rate in the third quarter a year ago.

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