Wells Fargo faces mounting pressure to cut costs as revenue stagnates

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Barred by regulators from adding assets for at least another six months, Wells Fargo has only one main lever to pull to boost returns: It must hack away at expenses.

That much was apparent even before the San Francisco bank reported its earnings on Friday, but the third-quarter results underscored the cost-cutting imperative.

Wells reported revenue growth of less than 1% compared with the same three-month period a year earlier, as average loans declined by 1%, and average deposits fell by 3%.

In a conference call with analysts, CEO Tim Sloan didn’t give investors much reason to expect a turnaround on the asset side of the bank’s balance sheet anytime soon.

“Our goal is not to grow loans. Our goal is to service customers and originate good credit,” he said.

Sloan also reiterated earlier comments that he expects the $1.95 trillion asset cap imposed by the Federal Reserve in February to remain in place through the “first part” of 2019.

So it was no surprise that the company faced a series of questions about its goal of reducing total expenses by roughly 6.5% over the next two years. By 2021, Wells Fargo expects to eliminate 5% to 10% of its roughly 265,000 jobs.

The company said that it closed 93 branches between July and September, reducing its coast-to-coast network to 5,663 locations, and is on track to shutter roughly the same number during the fourth quarter.

The mortgage business is another area where Wells Fargo is focusing on cutting expenses. Mortgage banking income at the company totaled $846 million in the third quarter, down 19% from the same period a year earlier, as rising interest rates constrained borrower demand.

Sloan was asked on Friday whether the firm’s mortgage business is rightsized for a continuing industrywide contraction in home loans.

“Well, it’s rightsized for today,” he replied. “But are we saying to all of our businesses, ‘What can you do to improve it?’ Absolutely.”

During a separate call with reporters, Chief Financial Officer John Shrewsberry said that Wells Fargo is consolidating call centers across the country as its customers lean more heavily on technology to replace lost cards and solve other problems.

In addition, the bank is paring its approximately 85 million square feet of commercial real estate, moving employees to a smaller number of larger campus-like workplaces, he said.

Shrewsberry also pointed to the bank’s ongoing efforts to operate in a more centralized manner in response to a question about the path to reducing total expenses to $50 billion-$51 billion by 2020.

“We’ve rolled up accounting and finance and [human resources] and risk and some other things into bigger operations, which allows us to get more scale advantage,” he noted.

During the third quarter, Wells reported noninterest expenses of $13.8 billion, which was down 4% from the third quarter of 2017. The firm’s efficiency ratio, a ratio of noninterest expenses to revenue, fell from 65.7% to 62.7%.

But salaries, employee benefits and advertising costs all increased when compared with the same quarter last year, though compensation costs were down slightly from the prior quarter. The overall year-over-year reduction in noninterest expenses was largely attributable to the fact that Wells Fargo had taken a big accrual in the third quarter of 2017 related to a settlement involving mortgage litigation.

Sloan acknowledged that various scandals that have dogged the bank over the past two years have inhibited growth in certain wholesale business lines, such as government and institutional banking.

Yet there were positive signs for Wells in a limited number of loan categories.

Auto loan originations totaled $4.8 billion, up 10% from the year-earlier period. That business line has begun to rebound after the company made a series of major changes that led to a contraction. “We’re well positioned for originations to continue to increase,” Shrewsberry told analysts.

Meanwhile, home equity originations at Wells rose by 16% to $713 million. As mortgage rates continue to rise, more U.S. households will turn to second mortgages when they want to tap their home equity, in order to avoid paying a higher rate on their first mortgages, Shrewsberry said.

The company’s quarterly net income of $6 billion, which was up from $4.5 billion during the same period a year earlier, benefited from a lower tax bill. Wells’ effective income tax rate was 20.1%, down from 32.1% in the third quarter of 2017, which was prior to the enactment of the Republican tax-cut legislation.

Investors appeared to see the results in a modestly positive light. Shares in Wells Fargo were up 1.15% in late afternoon trading, higher than the 0.80% rise in the S&P 500.

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