Wells Fargo's profit flat, costs and mortgages weigh

By Nikhil Subba and Dan Freed

(Reuters) - Wells Fargo & Co posted flat quarterly earnings on Thursday and warned its costs would remain elevated as the fallout from a sales practices scandal continues to impact the third-largest U.S. bank.

Higher personnel costs and legal fees as well as lower mortgage banking revenues kept Wells Fargo's first-quarter net income broadly flat at $5.5 billion and the San Francisco-based bank said expenses as a share of revenues would remain high.

Wells Fargo is trying to put a scandal over the opening of unauthorized accounts behind it and earlier this week said it would claw back an additional $75 million of compensation from the two former executives it blamed most for the debacle.

Known for consistently growing revenues and earnings in the post-crisis era, Wells Fargo has been thrown off course by the sales controversy and in recent quarters has also been disadvantaged by its smaller trading footprint.

Wall Street rivals have bounced back as bond and currency markets roared back to life last year with JPMorgan and Citi each reporting a 17 percent increase in quarterly profit on Thursday, beating analyst expectations and boosting their shares.

Wells Fargo's revenues fell about 1 percent to $22 billion and missed the average estimate of $22.32 billion. On a per share basis, profit rose to $1.00 from 99 cents a year earlier, beating the average analyst estimate of 97 cents.

Chief Executive Tim Sloan told analysts he expected new account and credit card openings to recover in the third quarter after a steady decline since the sales scandal broke in September but the bank said costs associated with the controversy, which were $80 million in the first quarter, would remain around $70 million to $80 million for an unspecified number of quarters.

The bank's efficiency ratio, a closely watched number reflecting non-interest expenses as a percentage of revenue, was 62.7 percent, compared with 58.7 percent a year ago and Sloan said it would be a challenge to get back to a preferred 55 to 59 percent level.

"I want to make it very clear that operating at this level is not acceptable," he said.

Sloan faces a rocky shareholder meeting on April 25 after influential proxy adviser Institutional Shareholder Services called on investors to vote against 12 out of 15 directors, including Chairman Stephen Sanger.

The bank's stock was down 1.8 percent in late morning trade on Thursday, the worst performer in the S&P 500 Financials Index.

After the close on Wednesday, Berkshire Hathaway Inc, Wells Fargo's largest shareholder, said it withdrew an application to the Federal Reserve to boost its ownership stake above 10 percent, and is instead selling 9 million shares to keep it below that threshold.

MORTGAGES AND COSTS

The Federal Reserve's decision to hike interest rates in March for the second time in three months has been welcomed by banks which earn more from lending out their deposits when rates rise.

Higher rates helped Wells Fargo earn more from lending with a 5 percent rise to $12.3 billion in its net interest income.

But higher rates can also put off borrowers, and Wells had a decline in total loans to $958 billion from nearly $968 billion in the prior quarter with a near $8 billion drop in consumer loans in that period.

Wells Fargo's mortgage business, the largest in the United States by volume, saw a 23 percent drop in fee income to $1.23 billion as customers shied away from refinancing their home loans.

Mortgage borrowing was likewise a dark spot in JPMorgan's results, with mortgage fees and loan servicing revenue tumbling 39 percent to $406 million from $667 million.

Wells' consumer business is also feeling the impact from its unauthorized accounts scandal with a steady decline in the number of consumers opening checking and credit card accounts.

Overall net profit at its retail bank, its biggest profit center, fell 9 percent due to a drop in fee income. Wells' wholesale banking division, which provides loans and other services to corporate clients, reported a 10 percent increase in net profit from a year ago.

Costs at Wells Fargo rose 6 percent compared to the year-ago period as the bank shelled out more for salaries as well as the legal costs related to the scandal.

(Editing by Carmel Crimmins and Meredith Mazzilli)