High costs haunt Wells Fargo results years after scandal

Wells Fargo & Co's profit plunged 57% in the third quarter, missing Wall Street's expectations as persistent costs tied to its years-old sales practices scandal continued to haunt the bank.

Like chief executives before him, new CEO Charlie Scharf, now one year on the job, has made cost cuts a cornerstone of his turnaround plan. He targeted $10 billion in savings annually over the long term, but investors are growing impatient.

"Why is that the number?" asked UBS analyst Saul Martinez about Wells' core cost guidance. "Because you haven't been anywhere near that number for five years."

The San Francisco-based bank, which has been in regulators' penalty box since 2016, spent $961 million on customer remediation accruals in the quarter, indicating that the bank was still feeling the burn from its sales practice scandal has already cost it billions.

Bank executives have signaled repeatedly that the worst of the fallout is in the past, but elevated operating losses have remained constant. Wells Fargo has reported large litigation or remediation charges in 7 of the last 11 quarters, according to filings.

Outgoing Chief Financial Officer John Shrewsberry made the same assurance last quarter.

"That is what I said and I was wrong when I said it," Shrewsberry told reporters on a call discussing results, adding that he still felt confident lumpy costs were in the past. "It wouldn't surprise me if people waited until the end of the next quarter to make sure that we lived up to that."

Cost-cutting initiatives are under way as Scharf begins implementing changes across the bank. Headcount fell by more than 1,000 from the prior quarter. But firm-wide expenses inched up slightly due to scandal-related operating losses and a $718 million restructuring charges tied to severance.

LOAN WEAKNESS

Rising costs, however, do not help as the banking industry deals with near-zero interest rates and slower loan growth.

Net-interest income at the fourth-largest US bank was $9.4 billion, down $512 million from the second quarter, as its loan book shrank 2%. Total revenue fell 14%.

Because Wells does not have a large capital markets business like JPMorgan Chase or Citigroup Inc, it has fewer ways to cushion declines in revenue from low interest rates.

Banking rivals including Bank of America Corp have also said net interest income should start to recover after the third quarter as loan demand picks back up. But Wells Fargo offered a more bearish outlook for its own revenue due to a growth restriction on its balance sheet imposed by regulators after the scandal.

"We won't be expanding the size of our balance sheet, really much for any reason because we're operating under an asset cap," Shrewsberry said. "We're not at it but we're pretty close."

The US Federal Reserve capped Wells Fargo's assets at $1.95 trillion in February of 2018 until the proves it fixed the risk management failures that led to widespread customer abuses. The bank has not given guidance on when it expects the cap to be lifted.

Total period-end loans fell nearly 4% to $920.1 billion, hurt by a $30 billion fall in commercial loans, a bigger slump than expected, Jefferies analysts said.

The US Federal Reserve placed restriction's on Wells' balance sheet as punishment for the sales abuses, to be lifted only when the management team can prove they have sufficiently improved risk management and controls.

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

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

Shares of the bank were down 5% at $23.51.