Wells Fargo on Thursday abandoned its efficiency targets and announced $4 billion in cost cuts in the wake of its bogus-accounts scandal.
Wells said slowing loan growth would prevent it from meeting goals that management has pursued for years. It boosted a plan to save $2 billion annually by the end of next year, saying it now will cut twice as much by 2019, according to a presentation on the company’s website.
Shares of the company fell 2.3%, the most in the KBW Bank Index, after the annoucement. They had recovered slightly, down 1.7%, to $53.80, by late morning.
Chief Executive Officer Tim Sloan is trying to counter the damage to Wells Fargo’s business after authorities found last year that the bank’s employees may have opened about 2 million unauthorized accounts to hit sales goals. Wells Fargo has spent at least $445 million on fines, remediation, consultants and civil litigation. On Saturday, its top investor, billionaire Warren Buffett, said managers were “totally wrong” in not acting faster to halt abuses.
The new efficiency-ratio goal is 60% to 61%, according to the presentation, which was posted ahead of Wells Fargo’s investor day event. Executives have said for at least four years that they were committed to achieving a ratio of 55% to 59% — a profitability target they reiterated in January even as the scandal fueled legal costs, making it harder to lure new clients. That month, executives laid out the previous $2 billion cost-cutting plan that included closing 400 branches through 2018.
In the first quarter, the efficiency ratio swung further in the wrong direction, rising to 62.7% — the worst since at least the 2008 financial crisis.
Wells Fargo said it would devote the first $2 billion of expense reductions to “support our investment” in operations and allow the rest to flow to profit.
Savings “will be driven by a deepened focus and continued improvement on effectiveness and productivity to drive efficiency," the company said.
The first $2 billion in savings will include $1.3 billion through “centralization” of functions such as marketing, finance, human resources, technology and data and contact centers. It said it would slash $170 million from branch spending to “eliminate overlap in the physical footprint.” An additional $550 million would be saved by trimming expenses for consultants, facilities and travel, plus capturing efficiencies from its risk department as the structure of the watchdog function matures.
Wells Fargo said new cuts would be focused on consolidating operations, improving processes through technology and automation, and outsourcing certain operations. It didn’t break down how much each of those efforts would save.
The company also said it expects to continue operating at the “low end” of targeted ranges for return on equity and return on assets through 2017. Those goals, respectively, are 11% to 14% and 1.1% to 1.4%. It said its performance would be limited by shifts in its balance sheet, including more expensive debt for funding and a lower-yield loan portfolio.
Like its peers, Wells Fargo said it still expects net interest income to increase this year, by “low to mid-single percentage points.”