Wells Fargo's Results Sink on Legal Reserves -- 3rd Update

By Ben Eisen 

Wells Fargo & Co.'s fourth-quarter profit plunged, hurt by costs related to its long-running fake-account scandal and flagging business lines.

The lender on Tuesday said it took a $1.5 billion charge for costs stemming from the scandal that has dogged it since 2016, fueling a 53% profit drop. The bank has said it is in talks to settle a joint Justice Department and Securities and Exchange Commission investigation into the matter.

The quarter also marked the start of the tenure of Charles Scharf, who joined Wells Fargo as chief executive in October. He has been tasked with resolving a pile of regulatory issues and improving the San Francisco-based bank's reputation.

In a statement, Mr. Scharf called the bank "a wonderful and important franchise that has made some serious mistakes." He said he would make fundamental changes to regain trust and would tackle regulatory problems "with a different sense of urgency and resolve."

The bank's quarterly earnings totaled $2.87 billion, versus $6.06 billion a year earlier. Per-share earnings of 60 cents missed the $1.12 expected by analysts polled by FactSet.

Wells Fargo shares fell 4% in morning trading.

Underneath the regulatory problems, Wells Fargo's business lines have also been struggling.

Fourth-quarter revenue fell 5%, to $19.86 billion from $21 billion a year earlier. Analysts had expected $20.1 billion.

Revenue declines have forced the bank to refocus on cutting costs, and Mr. Scharf said Tuesday that the cost structure was still too high. The bank's expenses rose 17% to $15.6 billion from $13.3 billion a year ago. Reflecting the cost of litigation, the bank's full-year expenses of $58.2 billion missed the company's target of about $53 billion.

Wells Fargo shares rose 17% in 2019, lagging behind its peers and the broader S&P 500. Shares were already down slightly to start 2020 before Tuesday's decline.

The Federal Reserve cut interest rates three times last year, adding pressure on the banking sector by crimping what banks can charge on loans.

Net interest income fell 11% from $12.6 billion in the year-ago quarter. Net interest margin, which measures the difference between what banks charge to lend and what they pay to borrow, dropped to 2.53% from 2.66% in the third quarter.

Despite falling rates, Wells Fargo paid more for its deposits. The yield on total interest-bearing deposits was 0.85% in the fourth quarter, versus 0.77% a year earlier.

Noninterest income, which is more protected from rate fluctuations, rose 4%.

Mortgage lending, a key area for Wells Fargo, picked up.

The bank was the largest mortgage lender by originations in the third quarter, according to industry research group Inside Mortgage Finance. It extended $60 billion in the fourth quarter as homeowners continued to refinance, versus $38 billion a year earlier.

Still, revenue was down from a year earlier in the consumer banking and wholesale banking business lines. The wealth-management division's revenues rose 3%, driven by stock market gains and higher advisory fees.

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Write to Ben Eisen at [e-mail]

(END) Dow Jones Newswires

January 14, 2020 11:44 ET (16:44 GMT)

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