NOT SETTLED YET: Wells Fargo has reported better-than-expected first-quarter results. Picture: BLOOMBERG/RON ANTONELLI
NOT SETTLED YET: Wells Fargo has reported better-than-expected first-quarter results. Picture: BLOOMBERG/RON ANTONELLI

New York — Wells Fargo’s better-than-expected results could be short-lived.

The firm warned on Friday that it may take a charge of as much as $1bn to settle a US probe of its consumer business. That would reverse its relatively rosy first-quarter results, which included higher profit and a smaller drop in revenue than Wall Street expected, after the US Federal Reserve prohibited the scandal-plagued bank from increasing assets until it fixes its missteps.

"We recognise that it will take time to put all of our challenges behind us," CEO Tim Sloan said in a statement on Friday.

In February, the Fed curbed Wells Fargo’s progress toward recovering from a long-running scandal involving misleading sales practices at its consumer bank. Since then, the nation’s third largest lender by assets has faced more scrutiny, with the US department of justice and the Securities and Exchange Commission (SEC) examining the wealth-management unit, a person familiar with the probes had said.

Shares of Wells Fargo fell 1.6% to $51.86 at 9.32am in New York, the second worst performance in the 24-company KBW Bank Index. The stock has dropped 13% this year.

The bank said on Friday that it’s in ongoing discussions with the US Consumer Financial Protection Bureau and Office of the Comptroller of the Currency over issues in its automotive lending and mortgage units. Those regulators have offered to resolve the matter for $1bn in penalties. If the bank agrees to pay, it would mark the second straight quarter that legal charges weighed on results.

In the fourth quarter, Wells Fargo booked a record $3.25bn charge related to regulatory investigations, sales practices and other matters.

First-quarter revenue fell 1.4% from a year earlier to $21.9bn, beating the $21.7bn average estimate of analysts in a Bloomberg survey. Profit also beat Wall Street expectations, climbing 5.7%.

Net interest income fell, even with the Fed raising interest rates. The firm blamed the decline on fewer days in the quarter and lower income from swaps. Average loans dropped to $951bn, the lowest since the second quarter of 2016, before the fake-accounts scandal erupted.

The Fed’s order weighed on the bank’s balance sheet. Wells Fargo said it reduced assets by about $15bn to comply with the sanction, and shrank further because of the loss of some clients’ deposits.

Expenses rose 3.3% despite Sloan’s plan to reduce expenses by $4bn by the end of next year.

JPMorgan Chase and Citigroup Ialso reported first-quarter results on Friday, with both posting strong gains in equities trading as stock-market volatility exploded after several years of relative calm.