Wells Fargo’s deposits and loans shrink despite strong economy

SAN FRANCISCO¬† — Wells Fargo, reeling from a series of scandals, is failing to cash in on the booming American economy.

America’s third-largest bank revealed on Friday that its deposits shrank by $40 billion, or 3%, over the past year because consumers and businesses held lower balances.

Even though the economy is strong, Wells Fargo (WFC) is lending less. The bank’s loan book dipped by 1% from a year ago as mortgages fell sharply.

Other big banks, buoyed by low unemployment and fast growth, are moving in the opposite direction. JPMorgan Chase (JPM) and Citigroup (C) revealed healthy increases in loans and deposits on Friday.

Wells Fargo’s results suggest the bank’s business is suffering consequences from two years of scandal and tough penalties from regulators. CEO Tim Sloan said Wells Fargo has made progress by refunding customers who were wronged and improving its risk management system.

“I’m confident that our efforts to transform Wells Fargo position us for long-term success,” Sloan said in a statement.

The news wasn’t all bad for Wells Fargo. The bank’s profit soared by 33% to $6 billion. The bottom line was juiced by the corporate tax cut, which lifted profit by $537 million.

Responding to criticism from Wall Street, Wells Fargo also successfully cut costs. Noninterest expenses were slashed by $299 million, or 7%, due in part by selling off an insurance business as well as a shareholder service.

Wells Fargo is aiming to make even deeper cuts. The bank recently announced plans to reduce as many as 26,500 jobs over three years in response to the rise of online banking and soaring legal bills.

Despite the austerity measures, Wells Fargo is spending heavily on share buybacks to try to rejuvenate its slumping share price. Wells Fargo said it repurchased $6.8 billion of stock last quarter, tripling what it did last year.

Wells Fargo is still grappling with life under the unprecedented asset cap imposed by the Federal Reserve earlier this year for “widespread consumer abuse” by the bank. The Fed cited the millions of fake accounts opened by Wells Fargo, as well as the thousands of borrowers charged for auto insurance they didn’t need and homebuyers hit with mortgage fees they didn’t deserve.

Deposits shrink even as rivals grow

Wells Fargo said its average deposits fell by 3% from a year ago to $1.3 trillion. The bank cited lower corporate deposits caused in part by efforts taken to “manage to the asset cap.”

But it wasn’t just about the sanctions from the Fed. Wells Fargo said its average consumer and small business banking deposits fell by 2% over the past year to $743.5 billion. The bank did not blame reputation issues.

Instead, Wells Fargo said “consumers continued to move excess liquidity to higher-rated alternatives.” In other words, Americans moved money into stocks, mutual funds and money market funds that offer high returns.

Yet Wells Fargo’s rivals did not appear to suffer the same fate. Citigroup’s deposits climbed by 4% to $1 trillion. Excluding currency fluctuations in Citi’s international business, deposits would have been up by 5%.

JPMorgan’s average deposits jumped by 4% to $1.5 trillion. “We continue to grow deposits faster than the industry, even as the pace slows with rising rates,” JPMorgan boss Jamie Dimon said in a statement.

Wells Fargo also said it paid higher rates on the deposits it does have. Average deposit costs nearly doubled from a year ago. The higher rates are a reflection of the Federal Reserve’s rate hikes and increased competition, especially from online lenders.

Loans under pressure

The good news is that Wells Fargo’s customer base is not shrinking. The number of customers who actively use their checking account rose nearly 2% from a year ago. Active online and mobile customers increased 4%.

Still, there are signs that Wells Fargo’s deposits will remain under pressure due to rising frustration among its customers. Consulting firm cg42 released a report this week projecting Wells Fargo will likely lose $93 billion in deposits over the next year because its customers are fed up with the cascade of scandals.

An exodus of customers could hurt Wells Fargo’s ability to make money off loans. The bank’s mortgage originations fell 22% last quarter to $46 billion. However, auto loans jumped by 10%.

JPMorgan and Citi both ramped up lending last quarter.