SAN FRANCISCO - Wells Fargo & Co. has been singled out by analysts as a leader in alternative delivery of banking services, but in the second quarter that spending finally began to take its toll.
In the period ended June 30, Wells Fargo's noninterest expenses rose $17 million, to $560 million, more than analysts had expected.
Wells Fargo "failed to deliver a visible, positive (earnings per share) surprise for the first time in several quarters, mainly due to a step-up in the pace of investments in new products (and) delivery systems," wrote Merrill Lynch analyst Judah Kraushaar. Wells Fargo management "has been suggesting this would occur for some time," Mr. Kraushaar added. "But until now, expenses seemed somewhat more restrained."
Wells Fargo has been singled out for innovation in personal computer banking and in direct-mail marketing of small-business loans. But some of its biggest capital outlays are believed to be going into the building of supermarket branches.
Banks have been running branches in supermarkets since the 1970s. But the idea has come into vogue recently, as bankers seize on supermarket branching to cut costs by sharing rent with other tenants, and to increase convenience.
The number of supermarket branches soared from 210 at the end of 1985 to 2,833 by June 30, according to International Banking Technologies, an Atlanta-based company that helps banks build those branches. The June tally exceeded that at the end of 1993 by nearly 900 branches.
In California, Wells Fargo has positioned itself as the most aggressive builder of staffed supermarket branches among the state's four biggest banks. By May, it was operating 60 fully staffed supermarket branches, three times as many as it had at the end of 1993, according to Donaldson, Lufkin & Jenrette.
At that time, Wells also was operating 101 so-called banking centers, which are supermarket branches staffed by only one person. The tally was nearly five times above that at the end of 1994. Analysts say it is no coincidence that from 1993 to May of this year Wells Fargo also shut down 50 traditional branches.
By contrast, Bank of America currently operates only 14 supermarket branches in California, though an additional 38 are planned by yearend, a spokesman said. Bank of America is also installing nearly 300 automated kiosks in Lucky grocery stores.
First Interstate Bank of California has three supermarket branches, while Union Bank has 28, officials said.
Many analysts believe it is still too early to tell if Wells' investment in alternative delivery will lead to increased earnings. Some, including Mr. Kraushaar, have expressed skepticism. They note that despite Wells' spending on alternative delivery systems, revenues remain flat.
"We are still struck by the current uninspiring relationship between revenue and expense increases," Mr. Kraushaar wrote.
But Donaldson Lufkin analyst Thomas K. Brown takes a much more positive view. "Wells continues to resemble a duck moving on the water with very little effort apparent on the surface but an incredible amount of constructive activity taking place that is hidden from view," he wrote in a recent report.