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Wells Fargo shares fall 3% on disappointing revenue, higher legal costs

  • Wells Fargo posts quarterly revenue of $21.93 billion, missing the $22.4 billion consensus estimate from analysts polled by Reuters.
  • The bank reports slightly better-than-expected earnings per share of $1.04, excluding 20 cents of charges related to litigation for a mortgage-related regulatory case from before the financial crisis.
  • The litigation cost increases Wells Fargo's efficiency ratio to a worse-than-expected 65.5 percent.

Wells Fargo reported third quarter revenue that missed expectations Friday, sending shares lower.

The bank reported:

  • Earnings per share of $1.04, ex-items, vs. the $1.03 a share expected by analysts polled by Reuters.
  • Revenue of $21.93 billion, vs. $22.4 billion expected.

Revenue fell 2 percent from the same quarter last year.

Shares fell more than 3 percent in trading Friday.

The adjusted earnings per share excludes 20 cents of charges related to litigation for a mortgage-related regulatory case from before the financial crisis, the bank said.

The litigation cost of $1 billion contributed to an operating loss of $1.3 billion in the third quarter and increased the efficiency ratio to a worse-than-expected 65.5 percent. The bank said in a May presentation that it expected a ratio of 60 to 61 percent for 2017.

"I think the company is probably going to need a more robust expense savings program in order to get down to that target," said Kevin Barker, senior research analyst at Piper Jaffray. He added that rising interest rates should have helped Wells Fargo lower its efficiency ratio.

A rising efficiency ratio indicates a bank's expenses are increasing or the company's revenues are declining. Overall noninterest expenses rose $14.4 billion, more than the $13.6 billion projected by FactSet.

Net interest income, a key measure of profitability, rose nearly $500 million from a year earlier to $12.48 billion, but missed expectations of $13.14 billion projected by FactSet.

"Over the past year we have made fundamental changes to transform Wells Fargo as part of our effort to rebuild trust and build a better bank," CEO Tim Sloan said in a statement. "We saw total average deposit growth; loan growth in our residential mortgage, credit card and subscription finance portfolios; as well as higher assets under management in Wealth and Investment Management."

Wells Fargo has struggled to recover from a massive consumer sales scandal last year that resulted in hundreds of millions of dollars in penalties and the resignation of then-CEO John Stumpf.

Sloan has since grappled with revelations of more fraudulent consumer accounts and a shakeup of board members. Asked Friday during a conference call with analysts whether the bank had reached the end of a months'-long analysis of what went wrong and how it could fix things, Sloan said the review is going to last a long time.

"We've said look we want to be the best in the industry," he said, admitting Wells isn't quite there yet. "It's a mistake to put a stake in the ground and say everything's got to be done by a certain date because then what happens is people might rush to get to the answer. I don't want them to rush the answer."

Wells Fargo shares are down 2.8 percent for the year. In contrast, the Financial Select Sector SPDR Fund (XLF) has climbed 12 percent to highs not seen since 2007.

Bank of America also reported earnings on Friday before the bell, beating expectations on the top and bottom lines.

Bank earnings season began Thursday with JPMorgan Chase reporting earnings well above Wall Street estimates but a big drop in trading revenue. Citigroup reported third-quarter earnings and revenue that beat expectations.