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Wells Fargo profits miss estimates on $1 bn litigation costs

Wells Fargo reported a sharp decline in third-quarter earnings Friday due to $1 billion in expected legal costs for government mortgage investigations.

Results were also hit by additional spending on compliance following a fake accounts scandal that has shadowed the big US bank over the last year.

Earnings at the US banking giant fell 20.2 percent to $4.2 billion, with the $1 billion in expenses related to “previously announced pre-crisis mortgage-related regulatory investigations.”

Revenues fell 1.8 percent to $21.9 billion.

Wells Fargo has disclosed a number of probes into its mortgage practices involving government agencies, including the Department of Justice and the Consumer Finance Protection Bureau.

The Justice Department has sought “information regarding the origination, underwriting and securitization of residential mortgages, including sub-prime mortgages,” Wells Fargo said in a July securities filing.

Litigation “remains a possibility,” the company added.

Other large banks that have reported thus far this quarter have bested expectations due to higher interest rates, which permits them to charge customers more for loans. Wells Fargo also benefited from higher interest rates.

However, unlike its peers, Wells Fargo’s total loans fell compared with the year-ago period.

The bank also reported an 8.2 percent rise in noninterest expenses to $14.4 billion, as it ramped up compliance efforts following the fake accounts scandal.

“Over the past year we have made fundamental changes to transform Wells Fargo as part of our effort to rebuild trust and build a better bank,” said chief executive Tim Sloan.

Wells Fargo earnings translated into earnings of 84 cents per share, well below the $1.03 expected by analysts.

Shares fell 2.3 percent to $53.90 in pre-market trading.

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