Wells Fargo Earnings Take $3.25B Litigation Hit

The consumer woes have led to higher costs and a deterioration of the bank’s efficiency ratio, a key measure of profitability.

Chief Executive Officer Tim Sloan distanced the bank from its historical goal of 55 percent to 59 percent in May, setting a new target of 60 percent to 61 percent, excluding litigation costs.

Sloan called Wells Fargo’s 62.7 percent reading from the first quarter “completely unacceptable.” The ratio was 76.2 percent in the fourth quarter compared to 65.5 percent in the third quarter. Without the litigation charge, the fourth quarter ratio would be 61.5 percent.

The lender had positive news on the tax front, as expected. As one of the few large banks with deferred tax liabilities rather than assets, Wells Fargo said it booked a $3.35 billion benefit stemming from changes to tax policy.

Its effective tax rate in 2018 will probably be about 19 percent, compared to more than 31 percent in both 2016 and 2015, the bank said.

Wells Fargo’s shares were down 1 percent at $62.60 at 9:38 a.m. in New York.

Here’s a summary of Wells Fargo’s fourth-quarter results:

• Net income advanced 17 percent to $6.15 billion, or $1.16 a share, from $5.27 billion, or 96 cents, a year earlier.
• Analysts called for an adjusted earnings per share of $1.02.
• Profit in the community banking division, which houses consumer operations including retail banking, mortgages and auto loans, rose 34 percent to $3.67 billion mostly because of benefits from tax changes.
• Mortgage-banking fees declined 35 percent to $928 million from $1.4 billion a year earlier. Residential originations were $53 billion from $59 billion in the previous three-month period.
• Analysts led by Keefe, Bruyette & Woods’s Brian Kleinhanzl had expected $928 million in fees.
• Auto-loan originations, which the bank has forecast would fall, declined 33 percent from a year ago to $4.3 billion.
• Earnings from the wholesale division, which includes the investment and corporate banks, fell to $2.15 billion, compared with $2.19 billion a year earlier.
• Loan-loss provisions fell to $651 million, lower than the $737 million analysts predicted.
• The provision in the third quarter was $717 million and $805 million in the fourth quarter of 2016.
• Net interest margin dropped unexpectedly 2 basis points to 2.84 percent.
• The 16 analysts surveyed by Bloomberg had expected it to increase 1 basis point to 2.87 percent.