Wells Fargo CEO Tim Sloan, shown in this file photo, and other executives held an investor day Thursday to update analysts on the bank’s plans. There’s no question that 2016 was among the toughest in our 165-year history,” Sloan said. Richard Drew AP
Wells Fargo CEO Tim Sloan, shown in this file photo, and other executives held an investor day Thursday to update analysts on the bank’s plans. There’s no question that 2016 was among the toughest in our 165-year history,” Sloan said. Richard Drew AP

Banking

Wells Fargo to double cost-cutting in wake of sales scandal

By Deon Roberts and Rick Rothacker

deroberts@charlotteobserver.com

May 11, 2017 9:20 AM

Wells Fargo said Thursday it plans to trim $2 billion in costs by the end of 2019, doubling a previous target as it remains under pressure to lower expenses in the wake of a sales scandal.

The San Francisco-based bank revealed the additional cost-cutting goal as part of an “investor day” event in which executives also outlined ways the company aims to boost revenue and roll out innovative new products.

Wells said it plans to wring costs from the nation’s No. 3 bank by assets through a variety of steps, including consolidating duplicative processes across lines of business, automating manual processes and outsourcing certain functions. Asked by the Observer about the possibility of job cuts, Wells would not provide any details.

Chief Financial Officer John Shrewsberry said at the event that the bank is looking at the ratio of managers to staff throughout the company. Other actions will include streamlining customer activities, such as the opening of new accounts, and the routing of call-center calls, Shrewsberry said.

In its presentation materials, Wells Fargo noted the new $2 billion in savings are projected to go to the bank’s “bottom line” – helping its profits. Wells Fargo has more than 24,000 employees in Charlotte, making it the company’s biggest employment hub.

The bank also disclosed Thursday plans to close about 450 branches in 2017 and 2018, adding clarity to a previous goal to close around 400 locations over the two years. The closures are expected to produce annual expense savings of about $170 million, Wells said. That move revs up efforts by Wells, which shuttered 84 branches in 2016, to shed locations after some of its rivals have been cutting at a faster clip.

CEO Tim Sloan kicked off the event at the San Francisco Four Seasons hotel by discussing last September’s revelations that Wells Fargo employees for years were opening accounts without customer knowledge to meet high-pressure sales goals. The scandal forced the bank to eliminate sales goals for branch bankers and make other changes in an effort to fix its reputation.

Sloan criticized the bad practices but said the bank was making progress at righting itself.

“There’s no question that 2016 was among the toughest in our 165-year history,” Sloan told the audience of analysts and investors as well as viewers online. “We had an incentive program and high-pressure sales culture within our community bank that over time drove behavior that in many cases was inappropriate and inconsistent with our values.”

“I’m very pleased with the hard work and effort of our team,” he said. “But we still have more work to do.”

We had an incentive program and high-pressure sales culture within our community bank that over time drove behavior that in many cases was inappropriate and inconsistent with our values.

Tim Sloan, Wells Fargo CEO

The latest cost cuts follow plans Wells disclosed in January to reduce annual expenses by about $2 billion by the end of 2018, with those savings getting plowed back into customer service, risk management, cyber security and other initiatives. Executives had signaled in April that they planned to outline additional cost-cutting measures during the investor day.

Since last year, the bank’s total employment has jumped by more than 4,000 to 272,800, as it added technology, risk and other workers.

Wells has previously said it expects to reduce staff through the centralization and streamlining of various processes, and by cutting back in the mortgage business, where loan volumes are declining from a recent rise in interest rates.

Wells Fargo is among other big banks that have pushed to slash costs during a prolonged period of low interest rates that have squeezed profits. But Wells is also facing additional pressure as it racks up consulting fees and other expenses related to the scandal.

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“Please raise your hand if you’re interested in hearing about expenses at Wells Fargo,” Shrewsberry joked to audience members at Thursday’s event.

On Thursday, the company issued a weaker forecast for 2017 on a closely watched profitability measure. Wells said it expects its “efficiency ratio” – a measure of what it costs to bring in $1 of revenue – to be in the 60-61 percent range. That’s a poorer performance than the long-standing 55-59 percent range that the bank views as appropriate. In the first quarter, the ratio was 62.7 percent.

“Operating at this level is completely unacceptable,” Sloan said.

On Thursday, Shrewsberry noted the focus on reducing costs is not new at Wells Fargo, pointing to a 16 percent reduction in the bank’s discretionary spending from 2014 to 2016. The category involves expenses associated with running the business, such as postage and supplies, travel and advertising, but not compensation and benefits.

Last month, Wells said it recorded around $80 million in expenses related to the scandal during the first quarter and that it expects to spend about that amount in future quarters. Such costs include fees for consultants involved with making sure the bank adheres to regulatory compliance orders. Those costs came in a quarter in which Wells reported flat earnings that featured a jump of more than $750 million, or 6 percent, in expenses from the same period a year ago.

Investors and analysts also heard Thursday from Charlotte-based Mary Mack, who in July took over the community banking unit at the center of the scandal. Since then, Mack has crisscrossed the U.S. on “listening tours” with employees and led the design of a new compensation plan for retail bankers after Wells eliminated product sales goals following the scandal.

Mack described the months since the scandal as difficult for the company. But she touted areas of progress, such as customer-satisfaction scores that have rebounded to levels before Wells was fined $185 million in September by authorities over the scandal. Customer loyalty scores, though, have improved but not fully recovered.

Analysts and investors are keeping a close watch on how lower customer activity in the wake of the scandal could affect Wells’ revenues in the long run.

In March, the latest month for which it has disclosed data, Wells Fargo reported 35 percent fewer checking accounts opening and 42 percent fewer consumer credit card applications from a year earlier.

“I know you’re also interested in how sales practices are impacting our revenue,” Shrewsberry said. But, he said, it’s challenging to produce a precise measurement because other variables could be at play, such as negative publicity and economic conditions.

“It’s a reasonable question,” he said.

Deon Roberts: 704-358-5248, @DeonERoberts

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