(Rick Rothacker and David Henry) - Wells Fargo & Co missed Wall Street earnings estimates by a penny a share as interest income was weaker than expected, a rare misstep for the fourth-biggest U.S. bank.
Wells Fargo's provision for credit losses fell sharply, but net interest income, a measure of profit on loans, also declined.
The bank's shares were down 6 percent to $25.03 in early trading.
"We can't change the economic environment, yet we have worked hard to control the variables we can," CEO John Stumpf said in a statement. "The economic recovery has been more sluggish and uneven than anyone anticipated."
Net income for common shareholders was $3.84 billion, or 72 cents a share. Analysts' average estimate was 73 cents, according to Thomson Reuters I/B/E/S. Net income a year earlier was $3.15 billion.
The bank's provision for credit losses fell to $1.81 billion from $3.44 billion a year earlier. Net interest income was down 5 percent to $10.54 billion, and net interest margin tumbled to 3.84 percent from 4.25 percent.
Wells Fargo's report comes as the industry struggles to hold onto recent profits after having lost tens of billions of dollars in the financial crisis. Overall, financial company earnings in the third quarter are expected to be up only a fraction of a percent from a year earlier and still less than half as much as they were five years ago, according to Thomson Reuters Proprietary Research.
Wells Fargo reported what it called "strong growth" in its loan book; commercial loans were up 3 percent in the quarter. The bank's overall loan portfolio was up 1.1 percent to $760 billion.
EXPECTING MORE
Analysts and investors have tended to expect more from Wells Fargo recently than from its bigger competitors because its shares are less subject to the ups and downs of the financial markets.
Shares of Bank of America, JPMorgan Chase & Co and Citigroup -- which do more of their business underwriting stocks and bonds and providing corporate takeover advice -- have fallen more this year than Wells Fargo's 14 percent loss through Friday.
"Wells Fargo missed by a penny so that's a little disappointing," said Channing S. Smith, co-manager of The Capital Advisors Growth Fund, which owns Wells Fargo. "One reason we're a big fan of Wells Fargo is there's less volatility in the earnings."
Wells Fargo said its earnings were boosted by releasing reserves of $800 million for bad loans, down from $1 billion in each of the first two quarters of this year.
Such releases amount to dipping into money previously set aside to cover bad loans and have been a significant part of bank earnings generally over the past year as lenders decided they had set aside too much.
Three months ago, Wells Fargo's chief risk officer, Mike Loughlin, told investors to expect more releases "absent significant deterioration in the economy."
The bank said it began "streamlining" staff functions and consolidating consumer lending businesses and several technology groups during the quarter. Noninterest expenses declined 5 percent from a year ago to $11.7 billion on lower personnel, merger and litigation costs. Under a program announced earlier, the bank is aiming to lower quarterly expenses to $11 billion by the end of 2012.
San Francisco-based Wells is looking to ramp up revenue by selling more products to East Coast customers following its 2008 purchase of Wachovia Corp at the peak of the financial crisis. Over the weekend, the bank finished converting Wachovia branches to Wells Fargo signs and systems, the last major step in the merger.
(Reporting by Rick Rothacker in Charlotte, North Carolina, and David Henry in New York; editing by John Wallace)
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