Wells Fargo Trips as BofA Cruises -- WSJ

Date : 10/14/2017 @ 3:02AM
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Wells Fargo Trips as BofA Cruises -- WSJ

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Lender's profit sinks 19% amid legal issues; Bank of America's net is biggest in six years

By Emily Glazer and Rachel Louise Ensign 

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (October 14, 2017).

Wells Fargo & Co. and Bank of America Corp. reported earnings Friday that benefited from low unemployment and gradually rising interest rates.

But their performance diverged from there, marking the strongest evidence yet that the two giant consumer lenders have changed places, with Bank of America emerging as a budding investor darling and Wells Fargo taking the role of problem child following a series of missteps.

Wells Fargo said Friday that third-quarter profit tumbled 19% from a year ago, due to continued fallout from its sales-practice scandal and fresh legal issues. The San Francisco bank said revenue and profit both fell from a year earlier, while its loan portfolio shrank for a third consecutive quarter. Wells Fargo continued to struggle with higher expenses in the wake of last year's sales-practices scandal and a newly disclosed $1 billion litigation charge tied to investigations into crisis-era mortgage-market practices.

Investors pushed Wells Fargo shares 2.8% lower.

Bank of America, on the other hand, is putting once-intractable problems behind it. The lender reported its highest quarterly profit in six years. The bank's revenue rose, as it did at peers J.P. Morgan Chase & Co. and Citigroup Inc. earlier in the week. Even a decline in Bank of America's trading revenue didn't dent overall results much, as gains in interest income and continued cost-cutting helped offset the weakness.

Wells Fargo, a former investor favorite that once surpassed J.P. Morgan as the most valuable U.S. bank by market capitalization, has slipped behind Bank of America to the number-three ranking on this basis.

While Wells Fargo by some measures remains the more profitable bank, the two lenders' revenues are now about equal, with Wells Fargo's roughly $87 million advantage down from nearly $900 million in the second quarter of 2016 before the sales problems emerged.

Led by Chief Executive Timothy Sloan, Wells Fargo reported that net income during the quarter slipped below $5 billion for the first time in five years, due in large part to the $1 billion it accrued for a previously disclosed mortgage probe over residential mortgage-backed securities. The bank is likely to settle with the Justice Department in coming months, finance chief John Shrewsberry said in an interview.

While Wells Fargo suffered a rough quarter, shareholder Hank Smith said he is optimistic about the banking sector overall. That, he said, is because of economic growth, slowly rising interest rates and the expectation of less onerous regulations under the Trump administration.

"While the quarter was a disappointing, it wasn't a dramatic disappointment," said Mr. Smith, co-chief investment officer of the Haverford Trust Co., which owns 2.7 million Wells Fargo shares.

The biggest reason for the shifting fortunes of the two banks is the declining number of regulatory issues at Bank of America and the increasing tally at Wells Fargo. As recently as 2014, Bank of America's results were dogged by tens of billions of dollars in penalties over financial-crisis era issues. Since then, the company's legal problems have eased and it has made a concerted effort to cut costs and focus on safer businesses like lending to consumers with good credit.

Wells Fargo didn't face as many regulatory fines until cross-selling abuses by branch staff erupted in September 2016, with employees creating potentially 3.5 million fake accounts. The bank fired 5,300 employees over five years related to the sales problems.

Two months after the bank settled that case, Donald Trump's election as president raised the prospect of faster economic growth and higher interest rates, a combination that brightened the prospects for many banks, but especially Bank of America given its large mortgage securities portfolio.

The result is that Bank of America shares have soared more than 63% over the past year, including a 1.5% rise in response to Friday's earnings report. That move over the past year is the biggest gain among the six big U.S. banks, four of whom reported earnings this past week. The last two, Morgan Stanley and Goldman Sachs Group Inc., are slated to report results Tuesday.

Wells Fargo posted the worst performance over the period, with a 20% gain.

Bank of America received an additional boost when Warren Buffett, whose Berkshire Hathaway Inc. is the largest shareholder at both lenders, discussed the banks in a late-August television interview. He said both were "terrific" but that Wells Fargo likely had more troubles ahead: "What you find is there's never just one cockroach in the kitchen."

He has praised CEO Brian Moynihan's leadership and said he plans to be a Bank of America shareholder for a long time.

Bank of America's third-quarter profit rose because the bank continued to cut costs and got a lift in lending profits from higher interest rates. The results put the bank close to its long-held profitability goals.

Costs at Wells Fargo, on the other hand, jumped 8% to $14.35 billion, and Mr. Sloan said they are likely to remain heightened through year-end 2018. The bank also raised the target for its so-called efficiency ratio because of lower-than-expected asset growth and higher-than-expected expenses, especially related to cyber, regulatory initiatives and data monitoring.

The $1 billion litigation charge at Wells Fargo also cut into its community banking unit results. This is one of the biggest parts of the bank, and it also suffered from weak mortgage results and more conservative auto lending.

Write to Emily Glazer at emily.glazer@wsj.com and Rachel Louise Ensign at rachel.ensign@wsj.com


(END) Dow Jones Newswires

October 14, 2017 02:47 ET (06:47 GMT)

Copyright (c) 2017 Dow Jones & Company, Inc.

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