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Wells Fargo Hit by Surprise Charge From Pre-Crisis Mortgages

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Nearly a decade after the financial crisis, Wells Fargo & Co. is getting stung by bad behavior in the housing bubble.

The company took a surprise $1 billion charge in the quarter for previously disclosed regulatory investigations into its pre-crisis mortgage activity, the third-largest U.S. lender said Friday in a statement. The expense pushed total costs to a record $14.4 billion.

This latest hit adds to Chief Executive Officer Tim Sloan’s challenges, 13 months after the San Francisco-based bank was rocked by a fake accounts scandal. Wells Fargo has struggled to attract customers after news broke last year that branch bankers opened thousands of accounts without customer approval to meet aggressive sales targets.

More recently, it’s come under fire over auto-loan clients who were forced to pay for unwanted car insurance and mortgage customers who were improperly charged fees.

“That charge was something of a surprise for us, but let us leave that on the side and the underlying trends remains in a lackluster trend,” Chris Kotowski, an analyst at Oppenheimer & Co., said in a note Friday. 

The bank is one of the last firms not to have settled with regulators and the Justice Department over its handling of home loans in the run up to the housing crisis. It provided more detail earlier this year in its annual securities filing.

“Wells Fargo, for itself and for predecessor institutions, has responded, and continues to respond, to requests from these agencies seeking information regarding the origination, underwriting and securitization of residential mortgages, including sub-prime mortgages,” the lender said at the time. “These agencies have advanced theories of purported liability with respect to certain of these activities.”

Misses Estimates

The charge cut 20 cents from the bank’s earnings per share this quarter, bringing profit to 84 cents. That fell short of the $1.03 average estimate of 26 analysts surveyed by Bloomberg. Shares slumped 3.6 percent to $53.22 at 9:54 a.m. in New York.

Net income fell 19 percent from the year earlier period to $4.6 billion. Analysts expected $5.13 billion.

Wells Fargo also had trouble in its underlying businesses. Revenue in the third-largest U.S. bank’s community banking division, the home for all the lending it does to America’s consumers, fell to $12.1 billion, the lowest since the quarter after news broke about the fake accounts. Net income in the unit, which generates about 60 percent of Wells Fargo’s profit, plunged 31 percent to $2.23 billion.

New auto loans declined 6 percent to $4.3 billion from the second quarter, when the firm lost its title as the largest auto lender to Ally Financial Inc. Mortgage banking fees tumbled for the fifth straight quarter to $1.05 billion as demand from homeowners for refinancing continued to wane amid rising interest rates. Originations ticked up compared to the second quarter to $59 billion.

Credit Cards

Fees from credit cards were flat compared to the year earlier at $1 billion. Revenue growth from that business has been declining over the last two years and customers opened fewer accounts in the first six months after the scandal.

The firm earlier this year stopped reporting how many new card applications customers submitted.

Adding to difficulties in the consumer bank, commercial loans have also flagged, slumping almost $6 billion from the second quarter to end the period at about $500 billion. Total loans declined 1 percent from the year earlier to $952 billion. The firm set aside $717 million to cover bad loans in the period, in line with analysts’ $718 million expectation.

Expenses, which have been elevated since the fake account scandal broke, rose 8 percent. The firm has paid or set aside more than $600 million for expenses tied to the sales scandal, and said it will give $80 million to wronged auto customers.

The wholesale division, which houses its investment and corporate bank, posted a profit of $2.05 billion, flat compared to a year earlier. Wealth and investment management, the smallest of the bank’s three divisions, generated $710 million in profit, a 4.9 percent increase.


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