Wells Fargo returned to profitability in the third quarter, posting net income of $2 billion for the third quarter as management begins to restructure the bank and cut billions in expenses.
It’s a rapid reversal from the second quarter, when the bank lost $2.4 billion, which was its first recorded quarterly loss since the financial crisis. The return to profit, though, was not as sharp as Wall Street analysts anticipated, and shares fell 4.5% in early trading.
Overall revenue at the San Francisco-based bank fell to $18.9 billion from $22 billion in the second quarter, according to its Wednesday earnings report. Expenses not related to interest rose $30 million to $15.2 billion.
While revenue fell and expenses rose, net income rose partly because the bank did not increase the reserve it holds in preparation for a wave of anticipated defaults related in part to the economic damage from the coronavirus pandemic, which remained at $20.5 billion.
‘Recovery remains unclear’
“Our third quarter results reflect the impact of aggressive monetary and fiscal stimulus on the US economy,” CEO Charlie Scharf said in a statement. Recovering mortgage and stock markets helped the earnings report, as did a general improvement in the broader economy, he said.
Still, “the trajectory of the economic recovery remains unclear as the negative impact of COVID continues and further fiscal stimulus is uncertain,” Scharf said.
That picture is a more dour one that its rival Bank of America painted in its earnings earlier Wednesday. The Charlotte-headquartered bank posted nearly $5 billion in profit for the quarter.
Signs of Wells Fargo’s ongoing drive to cut $10 billion in annual expenses appeared in the report, as well. The bank disclosed a $718 million charge for restructuring, which it said was primarily due to severance payments. Still, headcount only fell by 1,100 to 274,900.
The bank’s CFO has said that the $10 billion in cuts will mostly be made up of layoffs and take several years. Wells Fargo employs 27,000 in Charlotte.
“We believe that our franchise is capable of earning far more than we are earning today,” Scharf said on a call with Wall Street analysts Wednesday.
Spotlight on CEO
The results come as the honeymoon for Scharf is quickly wearing off.
Now one year into the job, Scharf has apologized for the bank’s past, settling with federal officials for $3 billion in February most of the outstanding matters related to the bank’s sales scandal. He’s put into place a wide-ranging review of all business the bank does, and pledged to cut what he sees as excess and waste at the bank while also fulfilling regulators’ demands.
While the second quarter loss frustrated analysts on Wall Street, it is the way the bank has had a reckoning on race that angered Main Street.
A comment on the pipeline of black executives attracted widespread criticism, as did the exodus of many of the bank’s senior-most Black women. Scharf apologized for the comment, and pledged to do more to improve diversity at the bank.
The report was the last one with chief financial officer John Shrewsberry, who has served in that role since 2014. He announced his retirement this year, and will be replaced this week by former BNY Mellon executive Mike Santomassimo.
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