Wells Fargo Faces $1 Billion Fine from Loan Abuses

(Reuters) - Two U.S. regulators have proposed Wells Fargo pay $1 billion in penalties to resolve probes into auto insurance and mortgage lending abuses at the third largest U.S. bank, overshadowing its first quarter results.

The San Francisco-based lender, which reported a quarterly profit, said it may have to restate results to reflect the final settlement. The proposed penalties were reported earlier this week by Reuters.

Analysts said that while the $1 billion penalty would not make a significant dent to its balance sheet, it may take the bank some time to repair the damage to its reputation.

Shares of the bank fell 3.4 percent to $50.89.

The bank, still smarting from a prolonged sales scandal in its retail banking business, found inconsistencies at its auto lending and mortgage in the summer of 2017 - leading to further probes by regulators.

To appease investors and regulators, the bank overhauled its operational structure, shook up its board and hired a new compliance officer.

But this failed to impress the U.S. Federal Reserve, which imposed restrictions in February on the bank’s growth, forbidding it to expand its balance sheet beyond 2017 levels until it makes internal changes that addressed risk management.

“A bank’s balance sheet is the engine for profit growth,” said Kyle Sanders, analyst at Edward Jones. “The constraints on Well’s ability to take on deposits and make new loans will likely result in lagging earnings growth for Wells relative to peers in the near-term.”

Wells estimates restrictions on balance sheet growth will cut annual profit by $300 million to $400 million this year.

Chief Executive Officer Tim Sloan repeatedly sought to reassure investors that the bank was stable despite the regulatory restrictions.

“I’m confident that our outstanding team will continue to transform Wells Fargo into a better, stronger company; however, we recognise that it will take time to put all of our challenges behind us,” Sloan said in the bank’s first-quarter results statement on Friday.

But as recently as last month, the bank also said it was examining its wealth and investment management business for possible customer abuse, including overcharging and inappropriate referrals, after inquiries from government agencies.

PROFIT RISES, REVENUE DIPS

Despite its ongoing woes, the bank reported a 6 percent jump in profit, saying net income applicable to common stock rose to $5.53 billion, or $1.12 per share in the quarter ended March 31, from $5.23 billion, or $1.03 per share a year ago.