WFC Wells Fargo and Company

By Emily Glazer 

Wells Fargo & Co. reported a decline in fourth-quarter profit as moves in interest rates, a falloff in mortgage revenue and the bank's recent sales-tactics scandal weighed on the nation's third-largest bank.

Shares fell about 1% in premarket trading after the results were announced.

The San Francisco-based bank reported a profit of $5.27 billion, or 96 cents a share. That compares with $5.58 billion, or $1 a share, in the same period of 2015. Analysts polled by Thomson Reuters had expected earnings of $1 a share.

Wells Fargo noted that its earnings were hurt by what it called "hedge ineffectiveness," which related to the way it protects against swings in interest rates. The ineffective hedge reduced earnings by 7 cents a share. Earlier in 2016, this protection had led to a gain.

Revenue slipped to $21.582 billion from $21.586 billion, below the average analyst estimate of $22.45 billion.

The fourth quarter was the first three-month period to start after the regulatory fine was imposed. In September, the bank agreed to a $185 million settlement with two regulators and a city official over opening as many as 2.1 million accounts with fictitious or unauthorized information.

Since the scandal, new retail banking business such as customer checking account openings and credit card applications have fallen dramatically, including a drop of 40% and 43%, respectively, in December from a year ago.

Overall profits at Wells Fargo's community banking division, which includes the unit responsible for the questionable sales tactics, were $2.73 billion, a 15% decrease from the $3.3 billion it earned in the fourth quarter of 2015.

The scandal has boosted expenses, which are likely to remain high for some time. Wells Fargo CEO Timothy Sloan has said the bank expects to spend tens of millions of dollars to get through investigations and other regulatory matters related to its sales-practices scandal. Wells faces a spate of state and federal investigations, including by the Justice Department and the Securities and Exchange Commission.

Making matters worse, the higher costs come as interest rates remain at relatively low levels, despite a recent uptick. The result of this combination: Wells Fargo's return on equity continues to grind lower in the fourth quarter, at 10.94%, its lowest level in years.

In coming quarters, Wells Fargo and other big banks hope that interest rates continue climbing, as they did in the fourth quarter on the back of the Federal Reserve's second interest-rate bump since the financial crisis. Big banks earn more money by lending out their vast deposits when interest rates rise and there is a larger gap between short-term and long-term rates, a so-called "steep" yield curve.

But low rates have been a boon for certain aspects of home lending. Wells Fargo's mortgage business, the largest in the U.S. by volume, earned $1.42 billion in fees in the fourth quarter, falling 15% from the $1.66 billion it earned in same period a year ago. The bank extended $72 billion in home loans between the end of September and the end of December, compared with $47 billion in the fourth quarter of 2015 and $70 billion in the third quarter of 2016.

Total costs at Wells Fargo decreased 1% to $13.2 billion from $13.3 billion in the third quarter of 2016. Expenses as a share of revenue in the fourth quarter was 61.2%, above the 55%-59% range that Wells Fargo targets for its so-called "efficiency ratio." The bank said it expects the efficiency ratio to "remain at an elevated level," partly because of costs related to the sales scandal.

Despite overall loan growth, Wells Fargo reported that the profitability of its lending activities continued to be challenged. Its net interest margin, a measure of how profitably it can lend out its customers' deposits, grew to 2.87% from 2.82% at the end of September and 2.92% in the fourth quarter a year ago.

Wells Fargo had been one of the most consistent big banks at growing earnings and revenue. That momentum has been hit by the sales-practices scandal. In addition, regulators last month said the bank failed its so-called living will regulatory test of how the bank could unwind in a crisis scenario.

Write to Emily Glazer at emily.glazer@wsj.com

(END) Dow Jones Newswires

January 13, 2017 09:33 ET (14:33 GMT)

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