WFC Wells Fargo and Company

By 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 16, 2019).

Wells Fargo & Co. said Tuesday that third-quarter profit fell as lower interest rates hit the bank's lending profits.

Quarterly profit at the San Francisco-based bank was $4.61 billion, compared with $6.01 billion in the year-ago period. Per-share earnings were 92 cents. Analysts polled by FactSet had expected $1.24 a share.

Third-quarter revenue came in at $22 billion, up from $21.94 billion a year ago. Analysts had expected $21.09 billion.

The lender also took a financial hit related to the fake-account scandal that has dogged Wells Fargo since 2016. The company booked a $1.6 billion charge for legal costs related to its long-running sales-practices problems, but also had a $1.1 billion gain related to the sale of a business.

The bank's 2016 fake-account issue badly damaged Wells Fargo's reputation and led to a morass of regulatory problems. The bank announced last month after a six-month search that it would hire Bank of New York Mellon Corp. CEO Charles Scharf as chief executive. He starts next week but already has started briefings with the current management team, Chief Financial Officer John Shrewsberry said.

Mr. Shrewsberry said on a Tuesday call with analysts that he expects the new CEO to conduct a "complete strategic review" of the bank's businesses. Mr. Scharf also will be tasked with restoring the bank's battered reputation and improving its standing with regulators.

The bank also must contend with falling interest rates, which hurt profits. The Federal Reserve cut rates twice in the third quarter.

At Wells Fargo, that meant the yield the bank earned on assets such as loans dropped to 3.76% from 3.94% in the prior quarter, while the rate the bank paid on interest-bearing liabilities including customer deposits dropped to 1.46% from 1.50%. Taken together, that pushed the bank's net interest margin to 2.66% from 2.82% in the previous quarter.

Wells Fargo's net interest income fell 8% in the third quarter from a year earlier.

The bank's key business lines have struggled since the scandal. What was once an aggressive rapidly growing lender whose profit towered above those of rivals has become a firm with sluggish revenue that is leaning heavily on cost cuts. Those trends continued in the third quarter, when the firm's return on equity stood at 9%.

Revenue fell year over year in consumer banking and wholesale banking. It rose in the bank's wealth unit, but only due to the gain on the sale of a retirement and trust business.

Income from mortgage banking fell even though lower rates meant the bank originated more home loans.

The litigation costs also helped push expenses up 10% in the third quarter from a year earlier despite cost-cutting goals. Wells Fargo also paid out more in salary and commission.

Write to Rachel Louise Ensign at rachel.ensign@wsj.com

(END) Dow Jones Newswires

October 16, 2019 02:47 ET (06:47 GMT)

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