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Wells Fargo revises expense target, signaling profit difficulties ahead

From Reuters - October 13, 2017

(Reuters) - Wells Fargo & Co (WFC.N) management signaled on Friday that the bank may struggle to hit expense targets through next year, raising questions about how much a sales scandal is weighing on the bottom line.

Wells, the third-largest U.S. bank by assets, said its third-quarter profit fell 19 percent, mostly because of a $1 billion provision for a mortgage settlement over accusations dating to before 2008.

But management also revised a key expense target, saying the bank aims to spend 61 cents for every dollar of revenue it generates this year, up from a range of 60 to 61 cents. Chief Financial Officer John Shrewsberry suggested Wells Fargo may also face issues hitting next years cost-efficiency target.

Management now hopes to spend 59 cents for every dollar of revenue next year, the top end of a previous target of 55 to 59 cents, he said.

But much depends on loan growth and interest rates, as well as elevated costs from regulations, technology and lingering sales practice issues, Shrewsberry cautioned.

Wells Fargos loan balances at the end of the third quarter were $951.9 billion, down $5.6 billion from the second quarter and down $9.4 billion from the third quarter last year.

The banks shares dropped 3.7 percent to $53.19 as investors digested the results.

We are waiting for the quarter that Wells shows stronger momentum across the business and this was not the quarter, analysts from Keefe, Bruyette & Woods said in a client note.

Wells Fargo has been embroiled in a sales practices scandal for more than a year. It has acknowledged opening perhaps 3.5 million accounts in customers names without their permission, signing others up for unwanted auto insurance, charging some for a mortgage rate-lock feature they did not request and tacking other costly add-ons to accounts.

The bank also has the same underlying challenges as rivals, including a drop in mortgage refinancing, interest income rising slowly after a prolonged period of rock-bottom rates, expensive technology investments and new regulations.

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