UPDATE 2-Wells Fargo disappoints Wall Street as legal costs mount

Wells Fargo & Co missed third-quarter profit estimates on Tuesday as mortgage income sank and the fourth-largest U.S. bank by assets braced for additional legal expenses tied to a sales practices scandal that erupted more than three years ago. The bank is operating under heavy regulatory scrutiny, including an unprecedented cap on its balance sheet by the Federal Reserve, as it tries to rebuild its reputation after revealing in 2016 that it had opened potentially millions of unauthorized accounts.

Internal and regulatory probes have also discovered other issues, resulting in billions of dollars in fines and penalties, with the lender also launching a campaign to win back the faith of its customers and investors. The lender said on Tuesday it had set aside $1.6 billion for legal expenses related to the retail sales practices.

The scandal has also led to Wells Fargo hiring thousands to improve its risk management and to work through the regulatory fallout from the scandals. The bank has also been boosting its mortgage teams to prepare for higher volumes as interest rates decline following the Federal Reserve's two rate cuts, changing course after laying off about 1,000 employees in the division in 2018 in an attempt to save money.

Mortgage banking income fell 45% in the latest quarter. MORE WORK AHEAD

The lender's net interest income fell 7.5% to $11.63 billion, due to the U.S. central bank lowering rates to sustain the more than decade-long economic expansion. Wells Fargo, Citigroup Inc and JPMorgan Chase & Co had tempered their outlooks for net interest income last month.

"We have more work ahead, but I'm confident that our focused efforts and the fundamental strengths of Wells Fargo will continue to enable us to achieve success," Interim Chief Executive Officer Allen Parker said. Parker will hand over the reins to Charles Scharf, a one-time Jamie Dimon protégé known on Wall Street as a detail-oriented number cruncher who excels in streamlining operations, later this month.

Net income applicable to common stock fell to $4.04 billion, or 92 cents per share, in the third quarter ended Sept. 30, from $5.45 billion, or $1.13 per share, a year earlier. Excluding items, the lender earned $1.07 per share, compared to estimate of $1.15, according to IBES data from Refinitiv.

Wells Fargo's provisions for future credit losses jumped 20% to $695 million from a year earlier. The lender's shares were up 1.4% at $49.96 in morning trade.

 

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