Wells Fargo's new timeline to escape asset cap: There isn’t one

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Wells Fargo is done with self-imposed deadlines.

Executives at the embattled bank said Friday that they will no longer provide guidance on when the shackles affixed by the Federal Reserve are likely to be removed. They also declined to provide a timetable for the selection of a permanent CEO following Tim Sloan’s abrupt retirement last month.

The $1.88 trillion-asset company was previously forced to make multiple revisions to its estimate on when it would be released from regulatory purgatory. Most recently, Sloan had said that the asset cap that the Fed imposed in February 2018 would remain in place throughout this year.

On Friday, interim CEO C. Allen Parker said that while Wells Fargo is approaching the compliance work with appropriate urgency, the bank is not going to prioritize urgency over doing things the right way. “This is just simply too important for our company going forward,” he said during the firm’s quarterly earnings call.

Parker disclosed that he was in Washington earlier this week to meet with the company’s regulators. The Fed, the Office of the Comptroller of the Currency and the Federal Reserve Board have all expressed public dissatisfaction with Wells’ progress in making changes that are required under a series of consent orders.

In what was perhaps a tacit acknowledgment that the regulators’ criticism has merit, Parker said, “We early on marshaled what we thought were the necessary resources to get everything done in a manner of appropriate urgency and thoroughness.”

The company’s top executives did not provide a lot of new details about how the bank’s efforts over the last 14 months have fallen short or what it needs to accomplish in order to satisfy its regulators. They did, however, offer some perspective on the scale of the effort under way inside of a firm with 260,000 employees.

“This covers the entirety of the company,” Chief Financial Officer John Shrewsberry said. “This happens in every line of business, in every function, dealing with every business process.”

Wells Fargo has said that it plans to shrink its workforce by 5%-10% by 2021, but as of the end of last year the company had slightly more employees than JPMorgan Chase, which was 38% larger by asset size. So Wells executives were asked Friday about whether they should be thinking about a more dramatic restructuring than they have contemplated previously.

Shrewsberry responded by explaining that the company’s compliance efforts are building an end-to-end understanding of how everything gets done inside the bank, which long prided itself on its decentralized approach. That work will put Wells Fargo in a position to determine how it can continue to streamline its operations, he said.

Wells has been selling various business lines that it does not consider core parts of its business, and on Tuesday that the company announced plans to unload its institutional retirement and trust business. That segment is part of the company’s wealth and investment management unit, which has suffered as a result of the reputational damage the company incurred from a series of high-profile scandals.

In the first quarter, the bank’s wealth and investment management unit reported net income of $577 million, which was down 19% from the same period a year ago. But Shrewsberry dismissed a suggestion that the bank might consider selling its entire wealth management business.

“In the relatively near term, I certainly doubt it,” Shrewsberry said, noting that wealth customers often buy mortgages and other products from the bank.

Wells’ board of directors, which in late March launched its search for an outside candidate to become the company’s next permanent CEO, is getting no shortage of advice.

Legendary investor Warren Buffett, whose firm is the San Francisco bank’s largest shareholder, opined recently that Wells should not hire a CEO from Wall Street. During Friday’s conference call, Morgan Stanley analyst Betsy Graseck warned against hiring someone from outside the banking industry, arguing that a bank needs a leader who understands credit risk and interest rate risk.

In an interview, John Mackerey, a senior vice president at the ratings firm DBRS, said that the next CEO should be “someone that the regulators are … comfortable with.”

The board’s work is in its relatively early stages, according to Parker, who joined Wells Fargo as general counsel in 2017. But he offered no insight about the qualities that board members are seeking in the company’s next permanent CEO.

“It’s just not clear to me that anything in terms of their articulation of the criteria they’re applying will ever be something that goes outside the boardroom,” he said.

During the first quarter, Wells reported net income of $5.9 billion, which was up from $5.1 billion in the first quarter of 2018. Much of the improvement was due to income tax expenses that fell by 36%.

Wells said Friday that it expects its net interest income in 2019 to decline by 2% to 5%, a downward revision from its previous guidance, the midpoint of which was that net interest income would be flat. The company attributed the weaker outlook to factors that included a lower interest rate forecast and continued upward pressure on deposit pricing.

“I think a lot of our recent retail deposit gathering has been higher-cost than historically,” said Shrewsberry, who said the company has been using promotional high-yield certificates of deposit in certain markets.

Shares in Wells Fargo fell 2.6% in late-day Friday to close at $46.49. The KBW Nasdaq Bank Index was up 1.9%.

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Compliance Strategic planning Revenue and expenses Earnings John Shrewsberry Wells Fargo Federal Reserve OCC CFPB