At Investor Day held on May 11, Wall Street major – Wells Fargo & Company (WFC – Free Report) – doubled the cost-cutting program in the wake of disclosure of malpractices related to opening of around two million bank and credit card accounts without customers’ consent last year. Moreover, the bank was not able to maintain profitability as compared to the set targets.
“Operating at this level is completely unacceptable,” Chief Executive Officer Tim Sloan said Thursday as executives began Investor Day presentations in San Francisco. “We are committed to improving our efficiency while we continue to invest in our business for the long term,” he added.
According to management, slowdown in loan growth was the reason behind missing the long four-year targeted efficiency ratio of 55–59%, as the bank recorded 62.7% in first-quarter 2017. Therefore, Wells Fargo plans to eliminate $4 billion of expenses by 2019.
Amid the current challenging environment, Wells Fargo targets new efficiency ratio goal of 60–61% for 2017. Expenses rose as legal costs related to the scandal were high.
As per Wells Fargo’s new plans, initial expense reductions of $2 billion will be spent on “support our investment” in operations. Notably, in 2016, the bank devoted more than $7 billion on technology to meet customers’ needs.
Particularly, initial cost reductions of $2 billion will include savings worth $1.3 billion through “centralization” of operations such as marketing, finance, human resources, technology and data, along with contact centers. Further, a $170-million expense reduction is expected through closure of branches including 200 in 2017 and 250 by the end of 2018. In addition, elimination of expenses worth $550 is planned through reductions on consultants, facilities and travel, along with risk department changes.
Overall, the bank will control costs through consolidating operations, processes improvement through technology and mechanization, along with outsource of certain operations.
Moreover, Wells Fargo will continue to operate at the “low end” of targeted ranges of return on equity (11–14%) and return on assets (1.1–1.4%) through 2017.
Net interest income is expected to rise in low to mid-single percentage points in 2017.
Wells Fargo plans to carry on with its expense-control initiatives and shareholder-friendly programs.
Post-disclosure of malpractices, Wells Fargo has been facing issues with clients as they are reluctant to conduct business with the lender. The allegation led to many setbacks, including the bank’s shattered image, numerous lawsuits, triggered federal and state investigations, congressional hearings and the bank’s former CEO John Stumpf losing his job.
However, the bank undertook many steps to restore its reputation post exposure of the scam. While the current crisis at Wells Fargo will take some time to alleviate, we believe that the bank’s cost-control initiatives should support its growth profile, moving ahead.
Currently, Wells Fargo carries a Zacks Rank #3 (Hold).
Wells Fargo’s shares gained 9.9% over the last one year, compared with 35.8% growth recorded by the Zacks categorized Banks-Major Regional industry.
Stocks to Consider
Comerica Inc. (CMA – Free Report) has been witnessing upward estimate revisions for the last 30 days. Additionally, the stock jumped over 18% over the past six months. It currently carries a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Northern Trust Corp. (NTRS – Free Report) has been witnessing upward estimate revisions for the last 30 days. Also, the company’s shares have risen nearly 8.1% over the last six months. It presently holds a Zacks Rank #2.
The PNC Financial Services Group, Inc. (PNC – Free Report) has been witnessing upward estimate revisions for the last 30 days. Over the last six months, the company’s share price has been up more than 11%. It carries a Zacks Rank #2.
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