Wells Fargo quarterly profit slumps as legal costs mount

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© Reuters. A Wells Fargo logo is seen at the SIBOS banking and financial conference in Toronto© Reuters. A Wells Fargo logo is seen at the SIBOS banking and financial conference in Toronto

(Reuters) – Wells Fargo & Co (N:) reported a 55% slump in fourth-quarter profit on Tuesday, as the fallout from a sales scandal that erupted in 2016 drove the bank to set aside another $1.5 billion toward legal expenses.

Shares of the bank fell about 3% to $50.50 in premarket trading.

The lender 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 since it was revealed that the bank had opened potentially millions of bogus accounts.

Since then, the fourth-largest U.S. bank by assets has paid billions of dollars in fines and penalties.

San Francisco-based Wells last year appointed Charles Scharf, a one-time Jamie Dimon protégé, as its new chief executive officer, to help it rebuild its reputation with customers, investors and regulators.

“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.

“Our cost structure is too high, and I believe there are many areas where we will be able to increase our rate of growth,” he added.

Net income applicable to common stock fell to $2.55 billion, or 60 cents per share, in the fourth-quarter ended Dec. 31, from $5.71 billion, or $1.21 per share, a year earlier.

Analysts had expected a profit of $1.12 per share, according to Refinitiv data.

Wells Fargo’s net interest income fell 11% from a year earlier as the U.S. central bank lowered borrowing costs three times last year, in a bid to sustain the more than decade-long economic expansion amid the prolonged U.S.-China trade war.

The lender’s mortgage income, however, rose to $783 million from $467 million a year earlier, benefiting from the lower interest rates.

Mortgage applications have increased in most weeks since the Fed began reducing rates, according to a Mortgage Bankers Association index.

The bank’s efficiency ratio was 78.6%, compared with 63.6% a year earlier. The ratio measures non-interest expenses as a percentage of revenue.

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