Federal regulators are seeking a $1 billion payment from Wells Fargo to settle problems with mortgage and auto loan issues, along with compliance risk management concerns, the bank said Friday as it reported its first-quarter earnings.
Although the finances reported by the financial giant topped Wall Street forecasts, the San Francisco-based bank warned that the results are subject to change due to continuing talks with the regulators.
Wells Fargo said it was "unable to predict the final resolution" of its discussions with the Consumer Financial Protection Bureau and the Office of the Comptroller of the Currency and could not "reasonably estimate our related loss contingency" at this time.
The disclosure and resulting uncertainty likely mark a new setback for Wells Fargo. The bank has struggled to regain investor trust after a scandal involving an estimated 3.5 million accounts that may not have been authorized by customers. The consumer bureau, Office of the Comptroller of the Currency and Los Angeles legal officials hit the bank with $185 million in penalties for that episode.
If levied, a collective $1 billion penalty by the two regulators would be the highest-ever fine imposed by the consumer bureau. It could reduce Wells Fargo's first-quarter profit by approximately 20%, Kyle Sanders, an Edward Jones financial analyst, wrote in a research note issued Friday.
Wells Fargo (WFC) shares closed down more than 3.4% at $50.89 Friday.
The bank previously disclosed the issues under discussion with the regulators. They include extra fees Wells Fargo charged some customers to extend interest rate locks on mortgages because of delays that were caused by the bank, not the clients.
Wells Fargo said in October that it would issue refunds to customers who paid fees to extend mortgage rate locks between Sept. 16, 2013, through Feb. 28, 2017, but "who believe they shouldn't have paid those fees."
Additionally, the bank announced in July that it would give refunds to more than 570,000 auto loan customers who had been charged for auto insurance without their knowledge, even though most already had insurance coverage of their own.
Wells Fargo's statement said the talks with federal regulators have also focused on the bank's overall "compliance risk management program."
Citing "widespread consumer abuses and compliance breakdowns," the Federal Reserve, one of the bank's other regulators, imposed indefinite restrictions on Wells Fargo's growth and pushed for a shake-up in its board of directors. Wells Fargo accepted the sanctions and said they could reduce its profits by as much as $400 million this year.
Wells Fargo potentially faces a separate federal investigation of whether its wealth management division made inappropriate referrals or recommendations to the company's investment and fiduciary services business. Disclosing the issue in a March regulatory filing, the bank said it is conducting an internal review.
For the January to March quarter, Wells Fargo reported net income of $5.9 billion, or $1.12 per share. Wall Street analysts surveyed by S&P Capital IQ had forecast $1.11 per share.
The bank also reported revenue of $21.9 billion, topping the $21.7 billion forecast from the analyst survey.
Sanders estimated a potential $1 billion penalty could lower Wells Fargo's first-quarter earnings per share to nearly 91 cents.
During a conference call with investors and Wall Street analysts, Wells Fargo CEO Tim Sloan outlined the bank's effort to restore investor confidence and improve customer services. He said the bank had made progress but faces challenges ahead.
"We've certainly had a very thorough look into every nook and cranny of the company," said Sloan, when asked if potential new regulatory problems could emerge. "In terms of declaring victory and walking ahead, we're not at that spot right now."
In other first-quarter earnings reports Friday by major U.S. banks, JPMorgan Chase reported a 35% rise in profits that topped Wall Street expectations. The New York-based bank said its income tax expense fell by $240 million, reflecting a lower rate from the federal tax overhaul approved in December.
Separately, Citigroup reported first-quarter earnings and revenue that beat Wall Street forecasts. The New York City-based bank's results were boosted by lower corporate taxes and strong stock trading revenue. Benefiting from the federal tax overhaul, Citigroup's effective tax rate dropped two 24% in the January-March quarter, down from 31% during the same period last year.
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