Scandal Caught up With Wells Fargo in the First Quarter
Wells Fargo & Co (WFC), mired in litigation stemming from a sales scandal, posted a nearly flat first-quarter profit, hurt by lower mortgage banking revenue and higher expenses.
The third-largest U.S. bank by assets said net income applicable to common shareholders was $5.06 billion in the first quarter, down from $5.09 billion a year earlier.
Total revenue fell about a percent to $22.00 billion, missing the average estimate of $22.32 billion. The bank’s stock fell 2.1% in premarket trading Thursday in response.
Wells Fargo has been dealing with multiple lawsuits and regulatory inquiries since government investigations found in September that some of its employees had opened as many as two million accounts without customers’ knowledge.
The scandal damaged the bank’s folksy image and also led to the ouster of Chief Executive John Stumpf, but growing deposit balances and a stable level of account closings show that profitability in the long run should not be hampered.
The company has been reporting customer activity in its branch banking unit on a monthly basis ever since the scandal, in an effort to be transparent with investors and to win back their trust.
Total loans rose 1.2% to $958.41 billion in the first quarter, from a year earlier. Loan growth in general was soft in the first quarter across the industry, following an increase in interest rates from the Federal Reserve.
Mortgage banking revenue fell 23% to $1.23 billion. Wells Fargo is the largest U.S. residential mortgage lender, having made more than $244 billion worth of loans in 2016, according to trade publication Inside Mortgage Finance.
Net interest income – the amount banks gain from their various loans – rose 5.4% to $12.30 billion.
The U.S. Federal Reserve raised rates by 25 basis points in December and in March, besides indicating more rate hikes in the near future. The March hike was only the third in seven years. Higher interest rates are usually good for banks, allowing them to charge higher rates on loans.
Wells Fargo’s efficiency ratio, a closely-watched number reflecting non-interest expenses as a percentage of revenue, was 62.7%, compared with 58.7% a year ago and 61.2% in the previous quarter.
Prior to the sales scandal, Wells Fargo had consistently targeted an efficiency ratio of 55%-59% percent. The bank said it expects the ratio to “remain elevated.”
Non-interest expenses, which would include litigation costs, rose nearly 6% on the year to $13.8 billion.