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Wells Fargo Profit Surprise Offers Respite After Tough Start

Wells Fargo’s net income climbed 14 percent as the bank cut costs and revenue fell less than expected.

Wells Fargo Profit Surprise Offers Respite After Tough Start
A customer enters a Wells Fargo & Co. bank branch in Schaumburg, Illinois, U.S. (Photographer: Christopher Dilts/Bloomberg)

(Bloomberg) -- Wells Fargo & Co. investors who stuck with the bank through a bumpy few months are being rewarded with the best first quarter in five years.

Net income climbed 14 percent as the bank cut costs and revenue fell less than expected. While the bank’s scandals claimed former Chief Executive Officer Tim Sloan during the period, they didn’t bring major legal costs like the $1 billion settlement that marred last year’s first quarter.

While the bank searches for Sloan’s successor to move it past problems that have now brought down two CEOs, it demonstrated progress on initiatives he had started. Wells Fargo has tried to simplify operations, improve cost efficiency and pursue growth while constrained by regulatory restrictions.

Wells Fargo Profit Surprise Offers Respite After Tough Start

Still, revenue fell in all three of Wells Fargo’s business lines and net interest margin, the difference between what a bank charges borrowers and pays depositors, narrowed from the fourth quarter even as it grew at rival JPMorgan Chase & Co. At Wells Fargo, average loans and deposits fell in the first quarter from a year earlier, while growing at JPMorgan.

Wells Fargo’s “core operating fundamentals were short of our expectations, which had themselves generally trended down in recent quarters,” Chris Kotowski, an Oppenheimer & Co. analyst, said in a note to investors Friday morning.

Scandals erupted at Wells Fargo two and a half years ago with the revelation that employees opened millions of potentially fake accounts to meet sales goals. The fallout resulted in CEO John Stumpf’s ouster, with Sloan taking his place. During Sloan’s tenure, Wells Fargo discovered problems in more business lines, subjecting the bank to more than a dozen probes by U.S. agencies and a growth ban from the Federal Reserve.

Wells Fargo’s tumultuous start to 2019 was capped by Sloan stepping down at the end of March amid regulatory, political and investor scrutiny. The board is searching for a new leader outside the bank. Allen Parker, Wells Fargo’s general counsel, is running the bank in the meantime.

Revenue Beats

Revenue fell 1.4 percent to $21.6 billion in the first quarter but was still more than the $21 billion average estimate of 21 analysts in a Bloomberg survey.

Earnings per share rose to $1.20, sure to please at least one key investor. Warren Buffett, whose Berkshire Hathaway Inc. is the bank’s biggest shareholder, told the Financial Times earlier this month that he doesn’t care whether revenue increases at Wells Fargo, he cares “about whether they grow in earnings per share over time.”

Wells Fargo shares were little changed at $47.92 at 9:38 a.m. in New York. They’ve gained 4 percent this year, trailing the 17 percent increase in the KBW Bank Index.

JPMorgan also reported results Friday, posting an increase in revenue driven by record-high net interest income. Revenue on a managed basis at the biggest U.S. bank increased 4.7 percent to $29.9 billion.

Digging deeper into Wells Fargo’s first-quarter results:

  • Efficiency ratio, a measure of profitability, worsened to 64.4 percent from 63.6 percent in the fourth quarter of 2018. Sloan had been targeting 55 percent to 59 percent in the long term, excluding litigation costs.
  • Net interest margin fell 3 basis points from the fourth quarter even as banks continue to benefit from the Federal Reserve’s past rate hikes.
  • Non-interest expense fell 7.3 percent to $13.9 billion. Chief Financial Officer John Shrewsberry reinforced Wells Fargo’s commitment to a $52 billion to $53 billion non-interest expense target for 2019. Last month he deferred on guidance for 2020 until a new CEO is in place.
  • Fees from mortgage banking, a bread-and-butter product for Wells Fargo, fell 24 percent to $708 million in the first quarter from $934 million a year earlier.

To contact the reporter on this story: Hannah Levitt in New York at hlevitt@bloomberg.net

To contact the editors responsible for this story: Michael J. Moore at mmoore55@bloomberg.net, Daniel Taub

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