Cost-cutting is high on the agenda for CEO Tim Sloan as Wells Fargo seeks to rebound from one of most damaging banking scandals in recent memory.

The San Francisco banking giant said Friday that it plans to reduce its annual expenses by approximately $2 billion by the end of 2018. That would amount to roughly a 4% cut in noninterest expenses, though the company also said that it plans to reinvest the savings back into the business in hopes of improving top-line revenue.

Wells Fargo plans to make substantial cuts to its network of more than 6,000 branches, the largest in the industry. The bank expects to close 200 branches this year, and more than 200 next year. It closed just 84 branches in 2016, mostly during the last six months of the year.

Still, the company's plans to reduce expenses may not be aggressive enough to satisfy investors.

"Unfortunately, these savings are expected to be reinvested into the business, suggesting that the bottom line impact could be immaterial," analysts at Sandler O'Neill wrote in a research note Friday.

Wells is under pressure to reduce costs in part because the four-month-old scandal, in which front-line employees opened roughly 2 million phony accounts, is taking a toll on both sides of the company's balance sheet.

"Things have changed clearly, and expectations have changed," Wells Fargo CEO Tim Sloan said in explaining why the bank's efficiency ratio is at its highest level in almost six years.

Wells Fargo's efficiency ratio — which measures expenses as a percentage of revenue - rose to 61.2% in the fourth quarter, up from 58.4% a year earlier. That was its highest level in almost six years. Wells has long targeted an efficiency ratio between 55% and 59%.

The bank reiterated that target range on Friday, even as top executives acknowledged the damage done by the scandal.

"Things have changed clearly, and expectations have changed," Sloan said during a conference call with analysts, in response to a question about the bank's efficiency ratio.

Wells has suffered a sharp slowdown in the opening of new retail bank accounts since the scandal first made headlines in early September. In December, newly opened consumer checking accounts were down by 40% from December 2015, the company said Friday. Consumer credit card applications declined by 43%.

The short-term revenue impact of those declines has not been significant, according to Sloan. "But we want to be careful," he added. "To the extent that we're growing primary checking accounts at 3% instead of 5%, over time, that would have a bigger impact."

Sloan, who succeeded John Stumpf as CEO on Oct. 12, also warned that the scandal is having a negative impact on parts of the firm that rely on customer referrals by Wells Fargo bankers, including its industry-leading mortgage business.

"Referrals account for approximately 9% of mortgage originations in 2016," Sloan said. "And we expect that lower referrals in the fourth quarter will reduce funding volumes in the first quarter by approximately 2.5%."

Wells has also borne substantial new costs as a result of the scandal, though the company did not tally them on Friday. The firm said that it has hired an independent consultant to determine the root causes of the sales abuses, plus a second consultant to evaluate the company's sales practices more broadly.

The megabank is also analyzing whether unauthorized credit cards had a negative impact on customers' credit scores, and it is reviewing more than 200,000 cases for any evidence of forged customer signatures.

At one point Friday, an analyst asked Sloan whether the bank could provide the total recurring financial impact of the scandal, including both lower revenue and elevated expenses.

"No, I would say not," he responded.

Sloan is trying to find the best way forward for a bank that long relied on a strategy of selling additional products inside of branches to existing customers.

Earlier this week, Wells revealed some details of its revamped incentive compensation plan for retail banking employees. The new plan, devised by Mary Mack, who has been the head of Wells' retail banking unit since August, relies more on salary and less on performance bonuses. Sales quotas are gone altogether.

And in a symbolic break with its past, the firm said Friday that it will no longer report its cross-sell ratio, which was long the envy of the banking industry.

When asked about the decision to discontinue the cross-sell ratio, Chief Financial Officer John Shrewsberry said: "It's an artifact of what has been reported for a long time, but it hasn't been a key driver of investor concern."

He added during an interview that the company plans to replace the cross-sell ratio with other metrics that are better aligned with the company's revised incentive pay plan.

Wells Fargo's vow to cut $2 billion in annual costs and reinvest the savings in the business is likely to result in more spending on technology. Organizational changes that Wells announced in October place an emphasis on digital banking.

In addition to closing hundreds of branches, Wells said that it is looking to sell certain businesses that it does not consider part of its core, while centralizing various parts of its nationwide operations. Wells has sold off several noncore business lines over the last couple of years, including a crop insurance unit and a health services operation.

During the fourth quarter, Wells reported revenue of $21.6 billion, unchanged from the same period in 2015. Its net income was $5.3 billion, down 5.3% from the same period a year earlier. Earnings per share came in four cents below consensus expectations of analysts, at 96 cents.

Wells said that its earnings per share would have been seven cents higher were it not for the accounting impact that interest rate and foreign currency fluctuations had on its hedging strategy.

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Kevin Wack

Kevin Wack

Kevin Wack is a California-based reporter for American Banker who covers the U.S. consumer finance industry.