High costs haunt Wells Fargo results years after scandal

(Reuters) – Wells Fargo & Co’s WFC.N profit plunged 57% in the third quarter, missing Wall Street’s expectations as lingering costs from its multi-year-old selling practices scandal continued to haunt the bank.

FILE PHOTO: The Wells Fargo Bank branch is seen in New York, US March 17, 2020. REUTERS / Jeenah Moon

Like the CEOs before him, new CEO Charlie Scharf, who has worked for a year, has made cost cutting the cornerstone of his turnaround plan. He was aiming for $ 10 billion in savings annually over the long term, but investors are getting impatient.

“Why is that the number?” UBS analyst Saul Martinez asked Wells’ baseline cost forecast. “Because you haven’t been far from that number for five years. “

The San Francisco-based bank, which has been in the regulatory penalty box since 2016, spent $ 961 million on customer remediation provisions in the quarter, indicating that the bank was still feeling the burn from its scandal. sales practices that have already cost him billions.

Bank executives have repeatedly signaled that the worst fallout is in the past, but the high operating losses have remained constant. Wells Fargo has reported significant litigation or repair costs in 7 of the past 11 quarters, the documents show.

The outgoing CFO, John Shrewsberry, made the same assurance last quarter.

“That’s what I said and I was wrong when I said it,” Shrewsberry told reporters on a call to discuss the results, adding that he was still convinced that the lump sum costs were the past. “It wouldn’t surprise me if people waited until the end of the next term to make sure we were up to the task. “

Cost reduction initiatives are underway as Scharf begins to implement changes across the bank. The workforce was down by more than 1,000 from the previous quarter. But company-wide spending edged up amid scandal-related operating losses and $ 718 million in restructuring charges related to severance pay.

WEAK LOAN

Rising costs, however, are not helping as the banking industry faces near zero interest rates and slower loan growth.

The fourth-largest U.S. bank’s net interest income was $ 9.4 billion, down $ 512 million from the second quarter as its loan portfolio fell 2%. Total turnover fell by 14%.

Because Wells doesn’t have a big capital markets firm like JPMorgan Chase JPM.N or Citigroup Inc CN, it has fewer ways to cushion income declines due to low interest rates.

Banking rivals, including Bank of America Corp BAC.N also said net interest income is expected to start picking up after the third quarter, as demand for loans picks up. But Wells Fargo has offered a more bearish outlook for its own income amid a restriction on balance sheet growth imposed by regulators after the scandal.

“We’re not going to increase the size of our balance sheet, really for any reason, because we’re operating under an asset cap,” Shrewsberry said. “We are not there but we are quite close.”

The US Federal Reserve capped Wells Fargo’s assets at $ 1.95 trillion in February 2018 until it proved it fixed risk management flaws that led to widespread customer abuse . The bank has not indicated when it expects the cap to be lifted.

Total end-of-period loans fell nearly 4% to $ 920.1 billion, penalized by a $ 30 billion drop in commercial lending, a larger-than-expected drop, analysts at Jefferies said.

The US Federal Reserve has imposed restrictions on Wells’ balance sheet as a punishment for abuse of the sale, to be lifted only when the management team can prove that it has sufficiently improved risk management and controls.

Wells Fargo posted common equity net income of $ 1.72 billion, or 42 cents per share, for the quarter ended Sept. 30, from $ 4.04 billion, or 92 cents a year earlier.

Analysts had expected a profit of 45 cents, according to data from Refinitiv.

The bank’s shares were down 5% to $ 23.51.

Reporting by Noor Zainab Hussain in Bengaluru and Imani Moise in New York; Editing by Bernard Orr and Nick Zieminski

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