Wells Fargo profit boosted by lower reserves, easing sales scandal costs

(Reuters) -Wells Fargo & Co bounced back to a profit of almost $5 billion in the first quarter of 2021, ahead of Wall Street estimates as it reduced bad loan provisions and got a grip on the costs tied to its sales practices scandal.

The fourth-largest U.S. lender cut its allowance for credit losses by $1.6 billion, reflecting improving sentiment as an ultra-loose monetary policy, trillions in stimulus support and an accelerated vaccination program put the world’s largest economy on a more solid footing.

San Francisco-based Wells Fargo did not report material restructuring and remediation charges in the quarter as Chief Executive Officer Charlie Scharf carries out what he has said will be a “multi-year journey” to overhaul the bank.

The bank has been operating under penalties from regulators since 2016 when details of a sales scandal emerged and led to the departure of two chief executives and billions of dollars in litigation and remediation charges and a Federal Reserve imposed asset cap of $1.95 trillion.

The asset limit has kept Wells Fargo from freely increasing loans and deposits to boost interest revenue and better cover costs. Other banks’ balance sheets have swelled.

Average assets at JPMorgan Chase & Co, for example, increased 25% in the first quarter to $3.61 trillion from a year earlier, while Wells Fargo’s balance sheet shrank 1% to $1.94 trillion.

Wells Fargo said profit rose to $4.74 billion, or $1.05 per share, in the quarter ended March, from $653 million, or 1 penny per share, a year earlier.

Analysts on average had expected a profit of 70 cents per share, according to the IBES estimate from Refinitiv.

The slight year-earlier profit was caused by an exceptionally large provision for potential loan losses, as U.S. banks braced for unpaid bills due to the COVID-19 pandemic shuttering the economy and pushing millions out of work.

While Wells Fargo said its pre-tax, pre-provision profit was down 13% from a year earlier, JPMorgan said earlier on Wednesday its pre-provision profit was up 18% from a year earlier.

Changes in pre-provision profit are more important this quarter than usual because they are not impacted by different judgments banks make about future loan losses, analysts have said.

Wells Fargo reported overhead, or efficiency ratio, which measures cost per dollar of revenue, of 77% in the quarter, from 74% a year earlier.

Last year Scharf said he was looking for $10 billion of costs to cut over several years from the lender’s roughly $54 billion annual expense base to improve its overhead ratio.

TEPID LOAN GROWTH

Wells Fargo is also trying to compete while thinning out its management ranks. Average loans in its commercial banking division fell 19%, while JPMorgan’s similar division reported a 2% decline.

“Charge-offs are at historic lows and we are making changes to improve our operations and efficiency, but low interest rates and tepid loan demand continued to be a headwind for us in the quarter,” Scharf said in a statement on Wednesday.

The weak loan demand and low interest rates also hurt net interest income, which decreased 22%.

Average deposit balances at Wells Fargo were up 4%, from a year earlier, despite the banking system being flush with money as the Federal Reserve and the U.S. Treasury worked to support the economy during the pandemic.

JPMorgan said its deposits increased 36% from a year earlier.

Wells Fargo reported a 21% increase in deposits at its big consumer bank, compared with JPMorgan’s 32% increase in consumer deposits.

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