Wells Fargo profit slips for first time in 7 years

Wells Fargo's first-quarter profits slipped for the first time in seven years, as the biggest bank by market capitalisation in the US raised staff costs while making provisions to cover potential hits to its big energy portfolio.

Wells's net income was down 2 per cent from the previous year at $5.8bn, marking the first year-on-year decline since 2008.

Earnings from the wholesale division, where the San Francisco-based lender is making a big effort to gain market share at the expense of more capital constrained rivals, rose 3 per cent to $1.8bn, while net income from the wealth unit was up 18 per cent at $561m.

Wells has been hiring aggressively in this area, seeking to take advantage of changing pay structures at rivals such as Morgan Stanley.

At the core community banking division, serving consumers and small businesses, net income was off 5 per cent at $3.7bn, amid slightly weaker fee business and a sharp rise in provisions for credit losses, up from $419m last year to $617m.

The figures mark a rare slippage for a bank that has become a byword for dependability since the financial crisis, with net income rising metronomically from a low of about $2bn in the first quarter of 2008.

Shares in Wells fell about 1.34 per cent in midday trading in New York to $53.86.

The muted results highlight the lack of levers that even the best-managed banks have to pull to boost profitability, while interest rates remain low and regulators keep pressure on lenders to boost spending on compliance, risk management and information security.

Wells's 6 per cent rise in staffing costs from the previous year was mainly a reflection of extra investment in those areas, said John Shrewsberry, chief financial officer, on a call with analysts. "We have the best people, and those are not inexpensive," he said.

Wells's return on equity remains among the highest of US banks, at 13.17 per cent in the first quarter.

But its book value of about 1.7 times - a gauge of the market's expectations for profit growth - remains well adrift of pre-crisis levels of about 2.5 times.

"The market assumes the current depressed valuations will persist," said Brant Houston, co-manager of the disciplined equity and income opportunities strategies at Atlantic Trust Private Wealth Management in New York, which manages a total of $26bn in assets.

Before Tuesday's release, analysts were keen to see to what extent Wells would make provisions in light of the sharp fall in the price of oil, which has cast a new complexion on the bank's $18.5bn energy portfolio, equivalent to about 2 per cent of its total loans outstanding.

Wells's allowances for credit losses stood at $13bn at the end of March, equivalent to about 4.5 times the annualised net charge-offs of $708m, down $117m from the previous year, of the first quarter.

Actual energy-related losses were "minimal" during the quarter, said Mr Shrewsberry, describing the allowance as "absolutely adequate".

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