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Wells Fargo revises expense target, signaling profit difficulties ahead

Reuters 

By Dan Freed and Sweta Singh

(Reuters) - & Co management signaled on Friday that the may struggle to hit expense targets through next year, raising questions about how much a sales scandal is weighing on the bottom line.

Wells, the third-largest U.S. by assets, said its third-quarter profit fell 19 percent, mostly because of a $1 billion provision for a mortgage settlement over accusations dating to before 2008.

But management also revised a key expense target, saying the aims to spend 61 cents for every dollar of revenue it generates this year, up from a range of 60 to 61 cents. Chief Financial Officer John Shrewsberry suggested may also face issues hitting next year's cost-efficiency target.

Management now hopes to spend 59 cents for every dollar of revenue next year, the top end of a previous target of 55 to 59 cents, he said.

But much depends on loan growth and interest rates, as well as elevated costs from regulations, technology and "lingering sales practice issues," Shrewsberry cautioned.

Fargo's loan balances at the end of the third quarter were $951.9 billion, down $5.6 billion from the second quarter and down $9.4 billion from the third quarter last year.

The bank's shares dropped 3.7 percent to $53.19 as investors digested the

"We are waiting for the quarter that shows stronger momentum across the business and this was not the quarter," analysts from Keefe, Bruyette & Woods said in a client note.

has been embroiled in a sales practices scandal for more than a year. It has acknowledged opening perhaps 3.5 million accounts in customers' names without their permission, signing others up for unwanted auto insurance, charging some for a mortgage rate-lock feature they did not request and tacking other costly add-ons to accounts.

The also has the same underlying challenges as rivals, including a drop in mortgage refinancing, interest income rising slowly after a prolonged period of rock-bottom rates, expensive technology investments and new regulations.

That has made it hard for outsiders to quantify how much Fargo's scandal has influenced

On a conference call, analysts asked management whether weak loan growth was attributable to consumers backing away from the due to the scandal, or to the bank's caution about credit risk.

The missed Wall Street's revenue expectations for the fourth straight quarter due to the weak loan growth, and its lending profit fell.

Overall earnings fell to $4.6 billion. On an adjusted basis, profit was $1.04 per share, scraping past estimates of $1.03, according to Thomson I/B/E/S.

Revenue fell 2 percent to $21.9 billion, hit by a 37 percent slump in mortgage banking and auto lending. Analysts had forecast revenue of $22.4 billion.

Fargo's net interest margin, which measures the difference between what banks spend on funds and what they generate from lending those funds, was 2.87 percent, down from 2.9 percent the prior quarter and below some analyst expectations.

The spent 65.5 cents per dollar of revenue during the quarter and 63.1 cents per dollar year-to-date.

Shrewsberry said the is committed to a previously stated plan to cut costs by $4 billion by the end of 2019, half of which will be reinvested into businesses.

Net income in Fargo's community banking segment, the largest of its three major businesses and the one most directly impacted by the sales scandal, was $2.2 billion, down 31 percent due to the legal charge.

is the largest U.S. residential mortgage lender, making more than $98 billion of loans in the first half of the year, according to trade publication Inside Mortgage Finance.

(Reporting by Sweta Singh in Bengaluru and Dan Freed in New York; Editing by Lauren Tara LaCapra and Meredith Mazzilli)

(This story has not been edited by Business Standard staff and is auto-generated from a syndicated feed.)

First Published: Fri, October 13 2017. 22:15 IST
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