How Wells Fargo's $1 Billion Settlement Affects Its Earnings -- Update

By Michael Rapoport 

Wells Fargo & Co. still has a hangover.

Long after other major banks moved beyond big regulatory settlements, Wells Fargo is still coping with them. The latest, a $1 billion pact unveiled Friday involving allegations of improper charges to consumers in Wells' mortgage and auto-lending businesses, cut into the bank's already-reported first-quarter earnings and made it clear the San Francisco-based bank is in a different place than most of its rivals.

Wells Fargo said its $1 billion settlement with the Consumer Financial Protection Bureau and the Office of the Comptroller of the Currency was prompting it to revise its first-quarter profit downward by $800 million. That cuts the lender's earnings for the period to 96 cents a share from the initially reported $1.12.

As a result, Wells Fargo's latest earnings declined from the same year-earlier period instead of increasing as the bank had first reported on April 13.

Wells Fargo indicated in that earnings release that regulators had offered to resolve the matter for the $1 billion amount. The bank on Friday didn't elaborate on why it cut earnings by $800 million when the settlement was for $1 billion, and a spoksman for the bank declined to comment.

One possible explanation is that Wells Fargo previously set aside reserves to cover $200 million of the amount. That could suggest the $1 billion fine may have been higher than the bank had been expecting before regulators made their offer.

Fitch Ratings said in a note earlier this week that while it had incorporated an expected fine last fall on the auto portion of the matter into its ratings approach, the $1 billion was higher than it initially expected.

Barclays analyst Jason Goldberg noted, however, that a bank can reserve for a legal settlement only if it is probable and estimable. Wells Fargo "didn't have enough evidence" a week ago to take the charge, he said.

Instead, Wells Fargo had cautioned in its initial announcement of first-quarter results that it might later have to modify them if a settlement was reached. The bank is following an accounting rule governing so-called subsequent events. While the settlement was reached after the end of Wells Fargo's first quarter, the events that led to it occurred before the end of the quarter, and the settlement effectively altered Wells Fargo's status at the end of the first quarter.

That means the settlement has to be counted in first-quarter earnings and reflected in the official quarterly numbers Wells Fargo will file with the Securities and Exchange Commission.

The same rule has come into play before in banks' settlements with regulators. In January 2013, several major banks reached settlements over alleged mortgage abuses before they made any earnings announcements for the fourth quarter of 2012, and the impact of the settlements were counted against the banks' 2012 results.

Investors are taking the settlement in stride. Wells Fargo shares rose 2% Friday, the best performance among large U.S banks.

Write to Michael Rapoport at [e-mail]

(END) Dow Jones Newswires

April 20, 2018 19:12 ET (23:12 GMT)

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