Wells Fargo & Co. profit slumped 56 per cent as Chief Executive Officer Charlie Scharf took charges to address old scandals and begin his job-cutting push.

The bank posted a surprise increase in third-quarter expenses as it set aside almost US$1 billion for customer remediation and US$718 million in restructuring charges. That countered loan-loss provisions that came in at less than half what analysts had expected.

In his first year atop Wells Fargo, Scharf has been working to move the firm past a series of scandals. He’s charged with making harmed customers whole, repairing relations in Washington and improving earnings. He’s repeatedly lamented the bank’s high costs, pledging to ultimately shave US$10 billion off annual expenses.

“Our top priority continues to be the implementation of our risk, control and regulatory work, but we are also taking targeted actions to improve the experience for our customers, clients, communities and employees,” Scharf said in a statement Wednesday. “The trajectory of the economic recovery remains unclear as the negative impact of Covid continues and further fiscal stimulus is uncertain.”

The firm set aside US$769 million in loan-loss provisions in the three months ended Sept. 30, less than the US$1.65 billion analysts had forecast. Chief Financial Officer John Shrewsberry said last month that the firm wasn’t anticipating losses to be worse, but cautioned that “it’s hard to know whether they’re going to be better or just further out in the future.” At the end of the quarter, the bank had US$20.5 billion set aside for credit losses. Nonaccrual loans rose 5.5 per cent from the second quarter, largely driven by consumer mortgages.

Shrewsberry said on a conference call Wednesday that net interest income -- revenue from customer loan payments minus what the company pays depositors -- “could get a little bit softer” in 2021. Third-quarter NII fell 19 per cent from a year earlier to US$9.39 billion, and the bank lowered its full-year forecast to about US$40 billion. Wells Fargo’s outlook contrasts with that of rival Bank of America Corp., which said the third quarter is likely the bottom for NII. “We feel good about NII moving forward,” BofA Chief Financial Officer Paul Donofrio said Wednesday.

Wells Fargo shares plunged 5.2 per cent to US$23.46 at 11:49 a.m. in New York, partly on the bank’s NII guidance. The stock has declined 56 per cent this year, more than the 32 per cent drop in the KBW Bank Index.

Rivals JPMorgan Chase & Co. and Citigroup Inc., which reported their third-quarter results Tuesday, set aside just US$2.87 billion for loan losses in the period, also less than half what analysts expected, partly because they’d already been aggressive in beefing up their reserves in the first half of the year.

Wells Fargo’s non-interest expenses climbed by US$30 million from a year earlier to US$15.2 billion. The bank is working to dramatically reduce costs and has started workforce reductions that could ultimately number in the tens of thousands. Wells Fargo had 274,900 employees as of Sept. 30, down from 276,000 at midyear.

The firm is still under a costly Federal Reserve-imposed cap limiting assets to US$1.95 trillion, their end-of-2017 level. The restriction bit harder this year, constraining Wells Fargo’s ability to finance clients and react to the changing economic environment. It also put limits on the bank offsetting lower rates with growth, resulting in the sharp decline in NII. Wells Fargo reported US$1.92 trillion in assets at the end of the third quarter, down from US$1.97 trillion as of June 30.

“The Fed’s asset cap is making an already challenging environment even more difficult for Wells,” Kyle Sanders, an Edward Jones analyst, said in a note Wednesday. “In response, we anticipate Wells will focus on drastically reducing expenses to improve profitability. In our view, there is a tremendous opportunity to lower the company’s cost base and improve productivity.”

Also in Wells Fargo’s third-quarter results:

• Revenue fell to US$18.9 billion, beating analysts’ estimates of US$17.95 billion.
• The bank’s efficiency ratio, a measure of profitability, improved slightly to 80.7 per cent from 81.6 per cent in the second quarter.