By Dan Freed and Nikhil Subba
NEW YORK (Reuters) - Wells Fargo (NYSE:WFC) & Co's profit dropped for the fourth straight quarter as it set aside funds for potential legal costs from a bogus account scandal that cost former Chief Executive and Chairman John Stumpf his job.
The bank still posted net income that topped analyst estimates, helped in part by lower-than-expected loan-loss provisions.
Wells Fargo, which needs to reassure investors that it can keep its profit engine humming while changing its sales culture, still reported a metric that tallies the number of accounts that employees in its retail banking unit were able to "cross-sell" to customers.
Long the crux of Wells Fargo's strategy, cross-selling has been at the center of the scandal, since regulators said the pressure to hit sales targets drove employees to create unauthorized accounts.
Stumpf, under pressure from lawmakers and other critics, stepped down on Wednesday after 34 years with the bank, handing over the CEO role to Timothy Sloan, who had been chief operating officer, and the chairmanship to lead director Stephen Sanger.
"I am deeply committed to restoring the trust of all of our stakeholders, including our customers, shareholders and community partners," Sloan said in a statement on Friday.
Last month, the bank agreed to pay a $185 million settlement over its staff opening as many as 2 million accounts without customers' knowledge. The misconduct, carried out by low-level branch staff to meet internal sales targets, shattered the bank's folksy image and triggered a raft of federal and state investigations.
"We know that it will take time and a lot of hard work to earn back our reputation, but I am confident because of the incredible caliber of our team members," Sloan said.
Friday's results mark Sloan's first major test since taking the helm less than 48 hours ago. The scandal is a rare setback for Wells Fargo, which emerged from the financial crisis relatively unscathed.
The bank said non-interest expenses rose due in part to higher litigation accruals and salaries.
Wells Fargo, whose shares rose 0.8 percent in premarket trading, said its efficiency ratio, which measures expenses as a percentage of revenue, was 59.4. The bank had told investors in its latest quarterly filing on Aug. 3 to expect the ratio to be in the high end of a targeted range of 55 to 59 percent throughout 2016.
EARNINGS BEAT EXPECTATIONS
Several analysts attributed the earnings beat to Wells Fargo setting aside significantly less money to cover problem loans than had been expected.
The provision for credit losses of $805 million compared to an estimate of $1.31 billion from Susquehanna Financial Group analyst Jack Micenko.
Revenue rose 2 percent to $22.33 billion in the third quarter ended Sept. 30, while non-interest income fell 0.4 percent to $10.37 billion.
Net income applicable to shareholders fell 3.7 percent to $5.24 billion, or $1.03 per share, from $5.44 billion, or $1.05 per share, a year earlier.
Analysts on average had expected the No. 3 U.S. bank by assets to report earnings of $1.01 per share and revenue of $22.21 billion, according to Thomson Reuters I/B/E/S.
The cross-sell ratio in Wells Fargo's retail banking unit was 6.25, compared to 6.27 in the second quarter and 6.33 a year ago. Cross-sell refers to the number of products sold to the same customer or household.
Stock analysts have cut profit forecasts for the bank for quarters to come as a result of the firestorm. In addition to the settlement, San Francisco-based Wells Fargo has already fired about 5,300 employees in connection with the scandal.
Several big customers, including California and Illinois, have also suspended business relations with the bank.
The bank, which is under pressure to cut costs amid a drawn-out period of low interest rates, said non-interest expenses rose 7 percent to $13.27 billion. Analysts at Keefe Bruyette & Woods had estimated non interest expenses would be $12.82 billion.
The Federal Reserve, which raised interest rates for the first time in nearly a decade in December, has kept rates unchanged since but has indicated a possible hike this December.
Total loans rose 6.4 percent to $961.33 billion. The bank set aside $805 million to cover potential loan losses, up 14.5 percent from the third quarter of 2015.
Wells, the largest U.S. mortgage lender, reported $70 billion in home loan originations, up 27.3 percent from a year earlier and up 11 percent from the second quarter.
Mortgage banking revenue rose 4.9 percent to $1.67 billion, accounting for about 16 percent of non-interest income.
JPMorgan Chase & Co (NYSE:JPM), the biggest U.S. bank by assets, earlier reported a 7.6 percent drop in quarterly profit after recording a tax expense, compared with a rare tax benefit a year earlier.
Citigroup Inc (NYSE:C), the fourth-biggest U.S. bank by assets, reported a 7.8 percent fall in quarterly profit
Up to Thursday's close of $44.75, Wells Fargo's shares had fallen about 10 percent since reports of the settlement emerged in early September.