The first quarterly report for Wells Fargo & Co. under chief executive Charles Scharf revealed a larger-than-expected profit decrease.
Scharf took over as chief executive Oct. 21, coming over from Bank of New York Mellon as the fourth executive to serve in that Wells Fargo role since September 2016.
Wells Fargo reported Tuesday having $2.55 billion in fourth-quarter net income, down 55% from $5.71 billion from the previous year.
The primary reason for the decline was Wells Fargo taking an already declared $1.5 billion in litigation accruals “for a variety of matters, including previously disclosed retail sales practices matters,” John Shrewsberry, the bank’s chief financial officer, said in a statement.
Those accruals were valued at 33 cents a share, which lowered diluted earnings to 60 cents a share. By comparison, diluted earnings in the fourth quarter of 2018 were $1.21 a share.
The average earnings forecast was $1.12 by eight analysts surveyed by Zacks Investment Research. Analysts typically do not include one-time gains and charges in their forecasts.
Wells Fargo’s share price dropped as much as 5.47% during trading before closing down 5.35%, or by $2.79, to $49.32. The 52-week low is $43.34 on Aug. 15.
“Wells Fargo clearly missed expectations,” Goldman Sachs analyst Richard Ramsden said, citing fee revenue being down for the quarter while expenses were up.
“We believe that the market response to these numbers will be in part driven by the new CEO’s willingness to commit to near-term revenue and cost targets for 2020.”
For the full year, Wells Fargo’s net income was down 13% to $17.94 billion.
Its income tax expense dropped by 27%, or by $1.36 billion, to $4.16 billion. The federal corporate tax rate was cut by Congress from 35% to 21%, effective Jan. 1, 2018.
In August, the bank increased for at least the third time the amount of money it needs to set aside for potential accruals shortfall related to potential losses from legal actions. The bank reported the high end of its shortfall estimate at that time was $3.9 billion, up from $2.2 billion projected in September 2018.
The biggest shadow hanging over Wells Fargo is the Fed’s order, issued Feb. 3, 2018, that prohibits the bank from increasing its total assets beyond the $1.93 trillion it had on Dec. 31, 2017.
“Wells Fargo is a wonderful and important franchise that has made some serious mistakes, and my mandate is to make the fundamental changes necessary to regain the full trust and respect of all stakeholders,” Scharf said in a statement.
“During my first three months at Wells Fargo, my primary focus has been on advancing our required regulatory work with a different sense of urgency and resolve, while beginning to develop a path to improve our financial results. This work is necessary to build the appropriate foundation for us to move forward.”
Three banking analysts have projected a financial under-performance from Wells Fargo in fiscal 2020.
CFRA analyst Kenneth Leon lowered both his 52-week share-price target by $4 to $48, and his fiscal 2020 diluted earnings forecast by 25 cents to $4.35.
Baird analyst David George lowered his rating for Wells Fargo to “underperform.” Dick Bove with Odeon Capital lowered on Dec. 19 his ranking on Wells Fargo from “hold” to “sell,” saying it “appears to be directionless at the moment.”
Scharaf said “it is clear that our opportunities to improve our performance are substantial when we finish this work.”
“Our cost structure is too high, and I believe there are many areas where we will be able to increase our rate of growth.
“While it is too early to put time frames around these goals, we will be diligent in pursuing them, and I am confident the opportunities are meaningful,” Scharf said.
The bank set in January 2018 a target of $4 billion in expense reductions by the end of 2019. Identified areas for cost-cutting include marketing, finance, human resources, operations, technology, data and contact centers. There are plans to close up to 900 branches over the next four years to reduce the total to between 5,000 and 5,100.
The bank has announced plans to reduce its overall workforce by 5% to 10%, or by roughly 13,000 to 26,500 jobs, within three years.
Wells Fargo has about 2,900 local employees, part of the 3,600 in its 32-county Triad West region, as well as 25,100 in Charlotte.
The bank had 259,800 employees as of Dec. 31, down 1,600 from Sept. 30.
It closed 44 branches in the fourth quarter as part of 174 in 2019. It had 5,352 branches as of Dec. 31.
Wells Fargo typically serves as a bellwether for financial stocks each quarter because it is among the first, along with Citigroup and JPMorgan Chase & Co., to file its report.
Wells Fargo reported a 13% decline in loan revenue to $10.56 billion. Its provision for loan losses, which has a bottom-line impact, was up 24% to $644 million.
Fee income rose 4% to $8.66 billion. Service charges were up 9% to $1.23 billion, card fees rose 4% to $1.02 billion, while trust and investment fees rose 1% to $3.57 billion and insurance fees down 10% to $98 million.
Meanwhile, the bank had a 68% gain in mortgage banking fees to $783 million.
Overall expenses were up 17% to $15.61 billion. The bank’s income-tax expense for the quarter was at $678 million, compared with $966 million a year ago.
Brian Kleinhanzl, an analyst with Keefe, Bruyette and Woods, said the “quarter was noisy, but the end result was that noninterest revenues and expenses missed.”
“The expense miss was broad based and the $1.5 billion litigation accrual shows that the company is still facing issues from the sales practice scandal.”
Non-performing assets were at $5.65 billion as of Dec. 31, down from $5.98 billion on Sept. 30 and $6.5 billion on Dec. 31, 2018.
Net charge-offs were at $769 million on Dec. 31, compared with $645 million on Sept. 30 and $721 million on Dec. 31, 2018.
The bank spent $7.37 billion on share repurchases during the fourth quarter, as well as $2.14 billion on dividends. The bank has said it plans to spend up to $23.1 billion on share repurchases for the 12-month period that began July 1, of which $14.81 billion has been used.