20191229_srl_news_wellsfargo_p1 (copy)

The first quarterly report for Wells Fargo & Co. under chief executive Charles Scharf yielded an expected significant 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 a year ago.

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.

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.

Investors sent Wells Fargo's share price down as much as 3.6% in premarket trading, which tends to foreshadow early trading projections.

For the full year, Wells Fargo's net income was down 13% to $17.94 billion.

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 does not allow the bank to increase 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."

In early January, the number of banking analysts projecting a financial under-performance from Wells Fargo in fiscal 2020 has doubled to four in the past week.

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.”

The analysts’ outlooks follow those of Dick Bove with Odeon Capital, who lowered on Dec. 19 his ranking on Wells Fargo from “hold” to “sell,” saying it “appears to be directionless at the moment.”

Scharf cautioned that improving financial results still carries a cost-cutting element.

"It is clear that our opportunities to improve our performance are substantial when we finish this work," Scharf said.

"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."

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, as well as 3,600 in its 32-county Triad West region and 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.

The bank has been the residential mortgage leader among traditional financial institutions for years, but analysts say it has lost market share to online financial institutions, such as Quicken Loans, and financial-technology companies.

Overall expenses were up 17% to $15.61 billion. The bank’s income-tax expense was at $678 million, compared with $966 million a year ago.

Shrewsberry said loan revenue was down "predominantly by the impact of the lower interest rate environment."

"In addition, while we are spending what is necessary in order to improve risk management, our other expenses were too high and becoming more efficient remains a top priority.

"However, we continued to have positive business trends with both loans and deposits growing from the third quarter and a year ago."

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 said it 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 spent.

On Sept. 1, 2017, Wells Fargo confirmed that at least 3.53 million checking and credit-card accounts were affected by the scandal.

The scandal and the bank’s overall sales practices have been investigated by the U.S. Consumer Bureau of Financial Protection, U.S. Justice Department, U.S. Securities and Exchanges Commission, U.S. Labor Department, various state attorneys general and Congress.

Wells Fargo has agreed to pay more than $4 billion to date to settle various regulatory disputes since the fall of 2016.

rcraver@wsjournal.com

336-727-7376

@rcraverWSJ

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