Wells Fargo is still haunted by scandal

Wells Fargo ( WFC ) on Tuesday revealed a 23% fall in profits in the third quarter that disappointed investors. The decline was driven by a cost of $ 1.6 billion in legal costs related to the bank's notorious retail sales tactics.

"We thought we were past a lot of it, and then you see a $ 1.6 billion charge. It's a little disappointing," said Kyle Sanders, an analyst at Edward Jones.

Wells Fargo did not explain what triggered the legal hit other than to say that it is related to the previously disclosed retail practice in general.

"It's nothing new," John Shrewsberry, chief financial officer of Wells Fargo, told CNN Business during a conversation with reporters Tuesday afternoon. "It reflects something a few years old at this time. We'll all be happy when it's behind us."

Wells Fargo has not yet resolved a trio of investigations launched in 201[ads1]6 by the SEC, the Department of Justice, and the Labor Department.

Scharf, who is taking the reins of interim CEO Allen Parker next week, also has to navigate a smart business environment for the banks. The recent level of interest rates has reduced the loan's profitability, a crucial source of income for all banks, especially Wells Fargo.

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Lending profit fell 8% during the third quarter on Wells Fargo. The net interest margin, a closely monitored measure of profitability, fell sharply. The bank blamed the impact of the environment on lower interest rates.

However, Wells Fargo's shares jumped on Tuesday after the bank repeated its guidance for net interest income to fall by 6% for the year. Investors feared a sharp fall. And the bank said it expects a more moderate decline in 2020.

Like other lenders, Wells Fargo has been hurt by the Federal Reserve's interest rate cut and the fixed yield curve – the gap between short and long-term interest rates.
Banks pay interest on deposits at short rates, while they lend at long rates. They make money on the spread between the two. This gap has disappeared in recent quarters. The yield curve inverted up to and including the previous quarter, which means that long-term bonds had lower interest rates than short-term ones.

Sanders said Wells Fargo is particularly prone to these interest problems because of the reputation problems. In order to attract business, the bank needs to pay higher deposits than its competitors. Sanders said Wells Fargo cannot charge so much on loans.

Against the difficult backdrop, Wells Fargo reported that revenues were less than 1%, even though it exceeded expectations.

Wells Fargo continues to spend heavily despite pressure from Wall Street to get costs under control. The bank's non-interest expense rose 10% during the quarter to $ 15.2 billion. This was driven by the legal cost as well as an increase in personnel costs caused by higher salary, incentive and severance costs.

Despite reputation problems, Wells Fargo is still recruiting new customers. The bank reported about 24.3 million customers who actively use checking accounts. That's up 1.5% from the same quarter of 2018, and the eighth straight quarter with gains. Deposits increased by 2% to $ 1.3 trillion.

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Scharf, the former Bank of New York Mellon ( BK ) and Visa ( V ) CEO, must focus on resolving Wells Fargo's regulatory issues . The top priority will be to convince the Federal Reserve to lift the outstanding property imposed on Wells Fargo at the beginning of 2018 for "extensive consumer abuse." The capital increase prevents Wells Fargo from growing its balance sheet over $ 2 trillion, limiting the amount of loans the bank can make.

Wells Fargo reported sluggish deposit growth during the third quarter, even though the bank was not blamed on the asset. Average outstanding loans totaled $ 949.8 billion, up 1% from the previous year and changed little from the second quarter.

Nevertheless, Wells Fargo said it marks the first loan growth in almost three years.

The bank has aggressively used share repurchases to base its results. Wells Fargo rewarded shareholders by repurchasing $ 7.5 billion in shares during the third quarter. The buybacks shrank the bank's share by 3% from the second quarter.

Wells Fargo's earnings were boosted by $ 1.1 billion from the sale of the institutional pension and trust business. The bank sold the pension plan in April to Principal Financial ( PFG ) .

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