(Adds details on revenue growth, updates share price)
By Dan Freed
May 11 Wells Fargo & Co doubled its
cost-cutting target on Thursday after seeing expenses soar in
the aftermath of a sales scandal that the third-largest U.S.
bank is still trying to recover from.
But the move, detailed at Wells Fargo's investor day, failed
to impress Wall Street, because management also indicated that
revenue growth is suffering from the scandal, which involved
employees creating as many as 2.1 million unauthorized accounts
in customers' names to hit sales targets.
The San Francisco-based bank's stock was down 1.7 percent at
$53.81 in afternoon trading.
Wells Fargo plans to reduce expenses by another $2 billion
through the end of 2019, on top of a $2 billion cost-cutting
target management previously announced.
The cuts come after repeated questions from analysts and
investors about why Wells Fargo was not doing more to reduce
costs, which have been high by some measures when compared to
U.S. banking rivals.
But the scandal has only increased costs, as the bank has
tried to fix practices internally and respond to regulatory
inquiries and public backlash.
During the investor day event, executives said they
understood investor concerns and would take action.
Chief Executive Tim Sloan used the word "unacceptable" at
least twice, in reference to prior sales practices and expense
levels. Management had been trying to keep expenses in a range
of 55 percent to 59 percent of revenue, but in the first quarter
that ratio soared to 62.7 percent.
"Operating at this level is completely unacceptable," Sloan
As Chief Financial Officer John Shrewsberry began his
presentation, he joked to the crowd: "Raise your hand if you're
interested in hearing about expenses at Wells Fargo."
He said the bank plans to get back into its targeted ratio
in the coming years.
The sales abuses in Wells Fargo's branch banking operation
led to a $190 million regulatory settlement, launches of other
government probes, the firing of several bankers, the departure
of CEO John Stumpf and shareholders offering scant support for
most directors at the bank's annual meeting last month.
Nearly all of the executives speaking on Thursday, including
Sloan, are in new positions entered after the scandal erupted in
September. Wells Fargo's investor day is typically a biannual
event, but management held it a year early to provide more
information about how they are running the bank.
Sloan and his deputies indicated that the scandal had
impacted revenue, either because some customers may be less
inclined to do business with the bank or because reforms to
business practices have hurt sales.
For instance, Wells Fargo has changed pay structures so that
instead of being incentivized to boost sales figures, employees
are encouraged to deliver products and services customers
actually need. While executives have described such reforms as
necessary, they may also be hurting revenue.
"We had an incentive program and high-pressure sales culture
in our community bank that drove behavior that was at times
inappropriate and inconsistent with our values," Sloan said,
noting that management "took too long to appreciate seriousness
of the problem."
Wells Fargo bankers are getting fewer referrals from
branches for personal loans and home-equity loans, said Franklin
Codel, an executive in the consumer lending unit. That has led
to a 3 percent decline in business, though trends appear to be
stabilizing, he said.
The credit card business has also been hurt by the scandal,
said Avid Modjtabai, who heads Wells Fargo's payments, virtual
solutions and innovation group. The rate of new credit card
account openings has recently picked up, but Modjtabai did not
say when she expects the business to fully recover.
Overall, Wells Fargo expects net interest income to grow in
the low-to-mid single percentage points this year, which some
analysts characterized as disappointing, as were executives'
assertions that Wells will not hit its cost efficiency ratio
The new cost-cutting guidance fell roughly in the middle of
A big chunk of the savings will come from Wells Fargo's plan
to close 450 branches in 2017 and 2018, roughly 10 percent more
than its previous target.
Wells Fargo has been slower to cut branches than rivals like
Bank of America Corp or Citigroup Inc. It is a
quick way to slash expenses, though some banks, including
JPMorgan Chase & Co, have been cautious about trimming
branch networks because doing so can hurt revenue.
Through Wednesday's close, Wells Fargo's shares had risen 6
percent over the past six months, lagging gains of 14.1 percent
for JPMorgan and 28.7 percent for Bank of America.
(Reporting by Dan Freed in New York; Editing by Lauren Tara
LaCapra and Meredith Mazzilli)