Wells Fargo profit falls on sales scandal costs, higher reserves

Oct 14 (Reuters) - Wells Fargo & Co (WFC.N) on Friday reported a 31% decline in third-quarter profit as the bank racked up costs related to a fake accounts scandal and boosted its loan loss reserves in preparation for a potential slowdown.

The bank posted $2 billion in operating losses related to litigation, customer remediation, and regulatory matters associated with the now six-year-old scandal over its sales practices.

"Outstanding litigation, customer remediation and regulatory matters still remain and will likely result in additional expense in the coming quarters, which could be significant," Chief Financial Officer Mike Santomassimo said.

"Our top priority remains strengthening our risk and control infrastructure which includes addressing open historical issues and issues that are identified as we advance this work," Chief Executive Officer Charlie Scharf said in a statement.

"We remain at risk of setbacks as we work to complete the work and put these issues behind us and expenses this quarter reflect our ongoing efforts." Excluding items, the fourth-largest U.S. lender earned $1.30 per share, beating analyst expectations of $1.09 per share, according to Refinitiv IBES data.

Wells Fargo shares rose 4% to $43.99 in afternoon trade. They have dropped around 12% so far this year, as of last close.

Meanwhile, the bank set aside $784 million in the quarter for credit losses, compared with a $1.4 billion release a year earlier, when extraordinary government stimulus helped the economy to rebound from the pandemic hit.

The provisions included a $385 million increase in the allowance for credit losses reflecting loan growth and a less favorable economic environment, the bank said.

Banks are building up rainy day funds again amid worries that aggressive interest rate increases by the Federal Reserve to tame stubbornly high inflation will tip the U.S. economy into a recession.

The outlook has been further clouded by the Russia-Ukraine war and fading stimulus measures. Higher borrowing costs have also shackled demand for mortgages and car loans, crimping banks' revenues.

Non-interest expense rose 8%, while net interest income jumped 36%, primarily due to the impact of higher interest rates and higher loan balances.

The Fed raised interest rates by 150 basis points in the third quarter taking its key rate to the 3.00%-3.25% range, the highest level since 2008, helping banks earn more from loans.

Wells Fargo's average loans rose to $945.5 billion from $854 billion a year earlier.

The bank reported a profit of $3.53 billion, or 85 cents per share, for the quarter ended Sept. 30, compared with $5.12 billion, or $1.17 per share, a year earlier.

Wells Fargo's net interest income will rise 24% this year, up from its previous guidance of 20%, Santomassimo told reporters on a conference call.

"Both consumer and business customers remain in a strong financial condition, and we continue to see historically low delinquencies and high payment rates across our portfolios," Scharf said.

He said the bank was closely monitoring risks related to the continued impact of high inflation, increasing interest rates, as well as the broader geopolitical risks.

"While we do expect to see continued increases in delinquencies and ultimately credit losses, the timing remains unclear," Scharf continued.

Reporting by Noor Zainab Hussain and Niket Nishant in Bengaluru; Editing by Chizu Nomiyama and Mark Potter

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Lananh Nguyen is the U.S. finance editor at Reuters in New York, leading coverage of U.S. banks. She joined Reuters in 2022 after reporting on Wall Street at The New York Times. Lananh spent more than a decade at Bloomberg News in New York and London, where she wrote extensively about banking and financial markets, and she previously worked at Dow Jones Newswires/The Wall Street Journal. Lananh holds a B.A. in political science from Tufts University and an M.Sc. in finance and economic policy from the University of London.