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Fake account fallout overshadows Wells Fargo's $3.4 billion tax bounty

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Legal expenses from a massive fake accounts scandal cost Wells Fargo $3.25 billion and left it with 5.5 percent less profit at the end of 2017 than analysts expected. (Daniel Tepper/Bloomberg)

Wells Fargo had what could have been a winning hand at the end of 2017, posting a $3.3 billion gain from the Republican tax overhaul that cost two Wall Street giants dearly.

But legal expenses from a massive fake accounts scandal, a regulatory probe of the San Francisco-based lender's mortgage business and other issues wiped out most of it, costing the company $3.25 billion and leaving it with 5.5 percent less profit at the end of 2017 than analysts expected.

"While it's too early to determine the full impact, it appears that tax reform will benefit our customers and help grow the U.S. economy," CEO Tim Sloan said. He noted the bill approved in December had buoyed a bottom line that he has been working to rebuild after a 2016 settlement over the creation of more than 3.5 million bogus accounts damaged the bank's reputation.

"Wells Fargo is a much better company today than we were a year ago, and notwithstanding our challenges, I am confident that the hard work, dedication, and resiliency of our team members demonstrated throughout 2017 will make Wells Fargo even better in 2018," Sloan told investors on an earnings call Friday.

Indeed, 2017 was full of challenges for the bank as account openings declined in the wake of the scandal, which included revelations that executives had fired more than 5,000 workers over a five-year period for setting up unauthorized accounts to meet a sales goal of as many as eight products per household.

The disclosures prompted the abrupt departure of Sloan's predecessor, John Stumpf, and left the company grappling with customer and employee lawsuits as it lost lucrative government bond deals and faced congressional scrutiny.

A stock market surge since President Trump's election that nearly doubled rival Bank of America's stock price lifted Wells Fargo's just 26 percent.

Earnings in 2017's last quarter were merely the latest of the effects of the scandal. Litigation lowered the company's profit by 59 cents a share, Wells Fargo said, while initial benefits from the tax bill were valued at about 67 cents a share.

The lender was able to wrangle a net gain from the bill, which lowers the top U.S. corporate tax rate to 21 percent from 35 percent, because it was hurt far less by a one-time charge on overseas assets than competitors JPMorgan Chase and Goldman Sachs.

The levy of 15.5 percent on cash holdings and 8 percent on everything else cost New York-based JPMorgan $3.73 billion in the three months through December and Goldman Sachs an estimated $3.3 billion.

The charge is intended to buoy the economy because companies can bring the money back to the U.S. afterward without penalty; the previous system would have charged them the applicable (and likely higher) tax rate whenever they made such a move.

Wells Fargo's bill for the so-called repatriation was only $173 million, though it ultimately reported earnings of just $1.16 a share, shy of the $1.23 average expected by analysts. Net income rose 18 percent from a year earlier to $5.7 billion while revenue inched up to $88.4 billion.

The company's shares dropped 0.3 percent to $62.79 in New York trading early Friday afternoon, which analyst Brian Kleinhanzl of brokerage Keefe, Bruyette & Woods attributed partly to the large litigation bill.

"Overall, results were below our expectations," he wrote in a note to clients.