‘Extraordinarily inefficient’: Scharf’s blunt assessment of Wells Fargo

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To anyone who doubted the magnitude of the challenges facing Wells Fargo’s new CEO, the bank’s fourth-quarter results offered an emphatic rejoinder.

Revenue fell by 5% from the same period a year earlier, and even apart from another massive accrual for anticipated litigation-related costs, noninterest expenses climbed by 5%. It added up to the San Francisco bank’s lowest quarterly net income in more than nine years.

“You can see that a series of legacy issues meaningfully impacted our results in the quarter,” CEO Charlie Scharf said during a call with analysts. “Even excluding these significant items, our results are not as strong as we aspire to.”

No one expected Scharf, who started on Oct. 21, to right the ship immediately, and nothing that he said Tuesday is likely to persuade observers that a turnaround will happen quickly. The CEO used blunter language than his predecessors to describe what needs to be accomplished in order to reignite earnings growth.

“There are still big parts of the company where we are extraordinarily inefficient,” he said at one point.

He declined to estimate when the $1.94 trillion-asset company’s sprawling regulatory problems might be resolved, though he said that he has spent almost all of his time over the last three months on regulatory issues, and he noted that Wells Fargo has 12 public enforcement actions that require a significant commitment of resources.

“Our job is to do the work that’s necessary. Regulators and other stakeholders will determine when it’s done to their satisfaction. My experience is that our regulators are clear, direct, tough but fair. The work is on us at this point,” Scharf said.

During the quarter, Wells Fargo set aside $1.5 billion for litigation expenses, which came on top of another $1.6 billion litigation accrual in the previous three-month span. The company said that the fourth-quarter accrual was partly related to its retail sales practices, as was the entire third-quarter accrual.

Retail sales practices at Wells Fargo have been the subject of an investigation by the Department of Justice and the Securities and Exchange Commission that grew out of the bank’s phony-accounts scandal.

“We’re having very constructive dialogue,” the bank’s chief financial officer, John Shrewsberry, said Tuesday in response to a question about the status of settlement talks with the Justice Department and the SEC.

Perhaps the biggest regulatory issue facing Wells Fargo is the status of the asset cap that the Federal Reserve Board imposed in February 2018. At one point, the San Francisco bank estimated that the cap would be lifted during the first half of 2019. More recently, the firm has declined to provide an estimated timeline.

On Tuesday, analysts at Keefe, Bruyette & Woods said they do not expect Wells Fargo’s assets to climb above the Fed’s $1.95 trillion cap until the first quarter of 2021. “Scharf very clearly stated that he is not suggesting that the regulatory issues will be closed this year,” the analysts wrote in a research note.

Scharf, a former CEO of Visa and Bank of New York Mellon, seemed more focused Tuesday on how to control expenses at Wells Fargo than on how to reignite revenue growth. The growth in noninterest expenses during the fourth quarter was driven partly by higher salaries and higher deferred compensation expenses.

“We want to be able to think with as clean a sheet as possible about how we should be spending our money,” Scharf said.

The fourth-quarter revenue decline was driven by an 11% year-over-year decrease in net interest income, which the company said was mainly a result of the impact of lower interest rates.

There were a few bright spots. Average loans rose by 1% to $956 billion, thanks to growth in residential mortgages, credit card loans and auto loans. Deposits increased by 4% to $1.3 trillion.

For the quarter, Wells Fargo reported net income of $2.9 billion, which was down sharply from net income of $6.1 billion in the fourth quarter of 2018. Shares were down nearly 5% late Tuesday, while an index of bank stocks was up slightly.

Scharf spoke in complimentary terms about Wells Fargo’s employees and the value of the firm’s large franchise. But he also highlighted the changes that he has begun to make at the top of the company — he said that newly hired Chief Operating Officer Scott Powell will lead a transformation in which operational excellence becomes part of the firm’s culture — and indicated that more big moves in the executive suite are coming.

Perhaps the clearest message Scharf sent Tuesday was that a turnaround will take time. “Thank you very much for your patience,” he told analysts at the end of the company’s earnings call.

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Earnings Expense management Revenue and expenses Compliance C-suite Charles Scharf Wells Fargo Federal Reserve DoJ SEC