By Laura J. Keller and Felice Maranz
(Bloomberg) --Wells Fargo & Co. is poised to spread pain to the rank and file.
That’s the view from analysts, who say the bank’s leadership almost certainly must announce more aggressive cost-cutting targets Thursday when hosting an annual investor briefing. After a bogus-account scandal spooked new clients and crimped profitability, Wells Fargo will probably eliminate more branches and dismiss staff, analysts say. The question is how deep the cuts will go.
Credit Suisse Group AG analysts predict Chief Executive Officer Tim Sloan will add $1.5 billion to his January pledge to eliminate $2 billion of expenses. At Jefferies Group, Barclays Plc and Sanford C. Bernstein & Co., analysts call for the target to rise by $1 billion.
“An extra $1 billion could help,” Jefferies’s Ken Usdin told clients in a note Monday. “The expected upsizing of the two-year, $2 billion cost-savings effort is the most anticipated part."
Sloan and his colleagues have repeatedly said they aren’t abandoning a key profitability target they declared half a decade ago, an efficiency ratio of 55 percent to 59 percent, even as the scandal fuels legal costs and makes it harder to lure new clients. In January, executives laid out a cost-cutting plan that included closing 400 branches through 2018.
But in the first quarter, the efficiency ratio swung further in the wrong direction, rising to 62.7 percent -- the worst since at least the 2008 financial crisis. The figure compares noninterest expense to net income.
“I want to make it very clear that operating at this level is not acceptable,” Sloan said on an April 13 conference call with analysts. “We are committed to improving.”
Mark Folk, a company spokesman, declined to comment on what will be revealed at Thursday’s Investor Day.
Sloan has said he’s focused on rebuilding shareholder and customer trust after authorities found last year that employees may have opened more than 2 million unauthorized accounts to hit sales goals. The bank has spent at least $445 million on fines, remediation, consultants and civil litigation. On Saturday, its top shareholder, billionaire Warren Buffett, said managers were “ totally wrong” in not acting faster to halt abuses.
Finding expense cuts to appease investors over the next 18 months will be difficult without also undermining revenue, analysts said. One area set for trimming is Wells Fargo’s network of 6,000 retail locations, according to Usdin. He said Wells Fargo has pared branches far less than rivals since 2011 -- closing 4 percent while the average competitor shut 12 percent.
For the bank to hit its target efficiency range, the retail unit will have to trim $600 million to $800 million, according to Guggenheim Securities analyst Eric Wasserstrom.
Such cuts would likely exacerbate the scandal’s impact on staff. After regulators fined the bank $185 million in September, past and current employees publicly complained they struggled for years to meet untenable sales quotas -- sometimes facing dismissal when they failed. The bank has since hired back about 1,000. More than 5,000 others were fired for allegedly cheating, such as by opening bogus accounts.
Interest in this year’s Investor Day is especially high. During the April 13 call, and again at a shareholder meeting a few weeks later, Sloan and Chief Financial Officer John Shrewsberry punted questions on their strategy for growth, pointing to the event on May 11. Investors, meantime, have expressed frustrations, voting by narrow margins to re-elect board members.
“Investors want more color” on how the bank will reinvest the cost savings, Bernstein analyst John McDonald wrote last week.
Executives should be prepared to discuss opportunities in wealth management and wholesale banking, the division that houses investment banking, Credit Suisse analyst Susan Roth Katzke said. Parts of those businesses, as well as credit cards, “have not reached full potential,” she wrote in a note last week.
Wealth management profit jumped 22 percent to $623 million in the first quarter after declining 4.1 percent in 2016. In the wholesale division, it rose 10 percent in the quarter to $2.1 billion after changing little last year. Fees from credit cards were roughly the same at $945 million.
Analysts also will be listening for comments on loan growth, particularly in commercial and industrial lending, mortgages and consumer and auto lending. And they’re awaiting an update on changes the bank is making to its sales practices and culture.
Costs from the scandal have been piling up. Shrewsberry said last month the bank will spend $70 million to $80 million per quarter on consultants and lawyers, increasing his earlier estimate by $20 million. Wells Fargo also was the only big U.S. bank to boost its estimate for potential legal costs at the end of the first quarter.
“Probable and estimable” legal expenses beyond existing reserves were as much as $2 billion as of March 31, an increase of $200 million from year-end, a regulatory filing showed Friday. Meanwhile, Citigroup Inc., JPMorgan Chase & Co. and Morgan Stanley lowered estimates for their own risks.
As for Wells Fargo’s retail bank, analysts said they want to hear how it might restore earnings. The unit saw profit drop 8.7 percent in the first quarter, pushing companywide results to miss estimates. The division’s contribution to total profit dropped more than 2 percentage points to 57 percent in 2016.
“To support share price outperformance, management must convince investors that its community banking unit is on firmer footing,” Katzke wrote.
To contact the reporters on this story: Laura J. Keller in New York at [email protected] ;Felice Maranz in New York at [email protected] To contact the editors responsible for this story: Peter Eichenbaum at [email protected] David Scheer, Dan Reichl
