Wells Fargo is still in turmoil as profits plunge and customer refunds linger

The Wells Fargo stagecoach is still broken.

The troubled bank reported a 56% decline in profits Wednesday, far exceeding the drops rivals have reported for the quarter. And earnings of 42 cents per share missed estimates.

Wells Fargo’s profit drop was driven in part by continued fallout from the bank’s various scandals. It reported nearly $1 billion of expenses linked to refunds for customers harmed by what the Federal Reserve has called “widespread consumer abuses.”

That hit to the bottom line is in sharp contrast to rivals. Citigroup (C) and Bank of America (BAC) reported this week more modest third-quarter profit drops of 35% and 16%, respectively – while JPMorgan Chase (JPM), the nation’s largest and bank, posted a surprise 4% increase in profit.

More than those peers, Wells Fargo (WFC) is getting dinged by near-zero interest rates.

Net interest income, a key metric of bank profitability, tumbled 19% to $9.4 billion. While all banks are grappling with historically low interest rates, Wells Fargo can’t offset that pain by aggressively lending – because of sanctions from the Fed that prevent it from growing its balance sheet.

“One obvious difference is that we won’t be expanding the size of our balance sheet for any reason because we’re operating with an asset cap,” Wells Fargo chief financial officer John Shrewsberry told reporters during a conference call. “Others are operating in a less constrained way.”

Jamie Dimon, chief executive officer of JPMorgan Chase & Co., poses for a photograph on the sidelines of the JP Morgan Global China Summit in Beijing, China, on Wednesday, May 8, 2019. Dimon?put the odds of the U.S. and China reaching a trade deal at 80 percent, sounding a note of optimism even after the rising specter of tariffs roiled global markets. Photographer: Giulia Marchi/Bloomberg via Getty Images

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Another difference is that Wells Fargo doesn’t have the same presence in booming Wall Street businesses that other big banks do. Goldman Sachs (GS), for instance, nearly doubled its third-quarter profit amid a surge in capital markets and IPO activity.

Job cuts at Wells Fargo

Wells Fargo also continues to grapple with far higher expenses than its rivals.

Noninterest expenses climbed another 5% compared with the second quarter. And the bank reported $718 million of restructuring charges, mostly because of severance packages paid to laid off workers.

Shrewsberry, who is retiring this fall after 22 years at Wells Fargo, said that a “big piece” of the bank’s cost-cutting plans will come from layoffs and natural attrition. “Undoubtedly there will be more over time,” he said.

Wells Fargo’s headcount stood at 274,900 as of the end of September, down by 2,200 from the year before.

Even though Wells Fargo’s serious legal troubles began four years ago with the fake-accounts scandal, the bank continues to struggle to turn the page.

In July, Shrewsberry said he believed the “worst” was over in terms of customer refunds for past practices. Yet Wells Fargo reported another $961 million of “customer remediation” during the third quarter “for a variety of matters.”

“I was wrong,” Shrewsberry said of his previous prediction. He explained that Wells Fargo realized it needed to make further refunds as new business leaders expanded the number of customers and time period it was evaluating.

“The belief is that we have now fully accounted for what it takes to close these things out,” said Shrewsberry.

The good news is that Wells Fargo’s revenue fell only 14%, exceeding Wall Street estimates. The bank’s credit metrics also improved: Wells Fargo set aside $769 million to cushion the blow from bad loans, which is down sharply from the $9.5 billion it set aside during the second quarter.

Still, Wells Fargo’s results provide yet more evidence of how it has become the nation’s weakest big bank.

The Warren Buffett-backed bank has lost more than half its value so far this year, badly trailing its peers. Last quarter, Wells Fargo was the only one to lose money, its first loss since the 2008 financial crisis. Wells Fargo is also the only major lender to cut its dividend, a rare step it last made during the Great Recession.