Litigation Costs Put Dent in Wells Fargo Profit

The beleaguered bank's shares fall 2.7% after it reports Q3 net income fell to $4.6 billion from $5.6 billion one year ago while EPS misses estimates.
Matthew HellerOctober 13, 2017

Wells Fargo shares fell nearly 3% on Friday after the beleaguered bank’s earnings missed analysts’ estimates in part because of litigation costs.

Wells’ third-quarter operating losses of $1.3 billion included a $1 billion litigation accrual for pre-crisis, mortgage-related regulatory investigations.

Largely as a result of the accrual, net income fell to $4.6 billion from $5.6 billion one year ago while earnings per share came in at 84 cents, well short of the $1.03 per share analyst consensus. Revenue fell 2% to $21.9 billion, missing estimates of $22.4 billion.

Excluding the impact of the litigation costs, Wells earned $1.03 a share. But in trading Friday, its shares dropped 2.75% to $53.69.

The nation’s third-largest bank by assets has been reeling from the scandal over fake accounts, which contributed to an 8% increase in expenses for the last quarter.

“Over the past year we have made fundamental changes to transform Wells Fargo as part of our effort to rebuild trust and build a better bank,” CEO Tim Sloan said Friday in a news release.

But as The Motley Fool reports, Wells “has seen its profitability plummet,” with return on assets falling in the third quarter to 0.94% compared to 1.17% a year earlier. The standard industry threshold is 1%, which Wells consistently exceeded before the accounts scandal.

“Wells Fargo is unlikely anytime soon to get back to the 1.3% level that it reported in the third quarter of 2015,” The Motley Fool said.

Additionally, the bank’s efficiency ratio — the proportion of revenue that it spends on operating expenses — climbed last quarter to 65.5%, well above the industry benchmark of 60%.

The $1 billion litigation accrual was recorded within Wells’ community banking segment, which also saw mortgage originations fall 16% to $59 billion and mortgage applications decline 27% to $73 billion.

CFO John Shrewsberry said the bank remains “committed to our target of $2 billion of expense reductions by the end of 2018 which will be reinvested in the business and an additional $2 billion by the end of 2019 intended to go to the bottom line.”