Wells Fargo's quarterly earnings, hit by regulatory penalties, drop 50%

Banking giant Wells Fargo reported Friday that its fourth-quarter earnings fell 50% to $2.9 billion, dragged down by costs tied to billions in regulatory fines and repayments for lending infractions.

The grim report comes days after the San Francisco bank announced it was cutting back on its mortgage business, a major Des Moines metro employer, with its mortgage division based in West Des Moines. The company, which has already slashed hundreds of jobs in the metro area, said more cuts are coming.

Wells Fargo reported $19.7 billion in revenue for the quarter that ended Dec. 31, down nearly 6% from the same quarter a year earlier. Expenses hit $16.2 billion, including billions in regulatory fines. Last month, Wells Fargo agreed to pay $3.7 billion to settle charges that it charged illegal fees and interest on auto loans and mortgages and incorrectly applied overdraft fees against savings and checking accounts.

Executives said they believed the bulk of their regulatory problems are behind them. CEO Charlie Scharf told analysts Friday said that "while our risk and regulatory work hasn’t always followed a straight line, and we have more to do, we have made significant progress, and are moving forward."

Wells Fargo also reported $353 million in severance costs tied to layoffs in home lending, cuts that are expected to continue this year. Some 425 employees already have lost their jobs in the Des Moines metro, where Wells Fargo, the region's largest private employer, has about 13,000 workers.

"Although we have reduced headcounts in this business throughout 2022, this charge includes the actions we plan to take in 2023 related to the mortgage announcement we made this week," Chief Financial Officer Mike Santomassimo said in the call with analysts.

The bank said Tuesday it was ending its correspondent mortgage operation — purchasing loans originated by other lenders — and scaling back its loan servicing businesses.

Fourth-quarter correspondent loan originations fell 58% to $6.4 billion compared to the same quarter a year earlier, the company reported Friday. And total mortgage originations for the quarter were $14.6 billion, down 70% from a year ago.

"If Wells Fargo is cutting mortgage operations, I can't see how this area will escape it," said Mike Lipsman, a principal at Strategic Economics Group in West Des Moines.

Wells Fargo Spokesman Michael Slusark Friday declined to comment Friday on possible job losses.

More: Expert: Wells Fargo cut of WDM-based mortgage business will 'come at the cost of jobs'

Home lending falls 57% in fourth quarter

Wells Fargo has struggled with rising interest rates that have dragged down mortgage lending. Scharf told analysts that the mortgage industry has changed since the 2008 financial crisis.

"We've been adjusting our strategy accordingly," he said. "We're focused on our customers, profitability, returns and serving minority communities — not volume or market share."

The lending industry has been dominated in recent years by online lenders like Rocket Mortgage, the nation's largest lender. The companies, which face fewer regulations and capital requirements, have used technology to make borrowing more convenient for customers, experts say.

Wells Fargo said home lending fell 57% to $786 million for the fourth quarter. In a couple of bright spots, credit card lending increased 6% to nearly $1.4 billion over a year ago and personal spending grew 9% to $303 million, the company said.

Scharf said despite "previously disclosed operating losses, our underlying performance reflected the progress we are making to improve returns."

"Rising interest rates drove strong net interest income growth, credit losses have continued to increase slowly, but credit quality remained strong, and we continue to make progress on our efficiency initiatives,” he said.

Fourth-quarter interest income grew 45% to $13.4 billion, mostly due to rising interest rates, the company said.

Non-interest income fell 46% to $6.2 billion, with declines in the company's venture capital and private equity businesses and lower asset-based fees in managing investments, based on lower market valuations.

Full-year earnings fell nearly 40% to $13.2 billion, with total revenue falling 6% to $73.8 billion. Earnings per share for the year fell nearly 40% to $3.14 for the year, the company said. Quarterly earnings per share fell 51% to 67 cents.

“The operating losses incurred in the fourth quarter reflect an important milestone in our work to resolve historical issues," said Scharf in a statement, adding that its December settlement with the U.S. Consumer Financial Protection Bureau "helps resolve multiple matters, the majority of which have been outstanding for several years."

More: Wells Fargo, Des Moines metro's top private employer, slashing mortgage business

Huge penalties drag down earnings

Regulators on Dec. 20 ordered Wells Fargo to repay $2 billion to consumers and also enacted a record $1.7 billion penalty against the company, with the bureau's director, Rohit Chopra, calling the bank ― which in 2016 was punished for opening accounts in customers' names without their permission ― "a corporate recidivist that puts one out of three Americans at risk for potential harm.”

Scharf said that "over the past three years we have made significant changes to address the matters referenced in the settlement and many of the required actions were already substantially complete prior to this announcement."

The company has launched new credit card options, created a digital banking platform for commercial clients and "made significant changes that helped millions of customers avoid overdraft fees,” Scharf said.

He said Wells Fargo's customers "have remained resilient with deposit balances, consumer spending, and credit quality still stronger than pre-pandemic levels."

"As we look forward, we are carefully watching the impact of higher rates on our customers and expect to see deposit balances and credit quality continue to return toward pre-pandemic levels," he said.

The company increased its credit loss provision for the quarter to $957 million, a 312% increase over a year ago.

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Donnelle Eller covers agriculture, the environment and energy for the Register. Reach her at deller@registermedia.com or 515-284-8457. 

This article originally appeared on Des Moines Register: Wells Fargo earnings drop 50% as company pays billions in fines