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Wells Fargo plans $10 billion in cuts, posts first quarterly loss since 2008

The Charlotte Observer logo The Charlotte Observer 7/15/2020 By Austin Weinstein, The Charlotte Observer

Wells Fargo said it plans to cut billions in expenses after posting a quarterly loss for the first time in over a decade on Tuesday.

The bank, the fourth-largest in the U.S., lost $2.4 billion in the second quarter, its first loss since 2008. That’s down from a profit of $653 million in the first quarter. Chief Executive Officer Charlie Scharf said on an earnings call with analysts that the bank plans to cut billions in expenses over an undetermined multi-year time frame, closing branches and eliminating management layers.

“Our expenses are at least $10 billion higher than they should be,” Scharf said, referring to the bank’s roughly $54 billion in annual spending. The bank has created a centralized team to cut expenses, with the first steps in the effort to start in the second half of the year.

Some employees have already been told their jobs will be eliminated, he said, but that their terminations were delayed due to the pandemic. In the past two weeks, the bank told federal regulators that it plans to close 65 branches across the U.S., many in small towns and rural areas. More cuts are expected across the entire bank over the coming years.

In the earnings, the bank also set aside $8.4 billion in the second quarter to cover coming defaults on loans due to the coronavirus pandemic and cut its dividend to 10 cents per share from 51 cents per share. Shares fell 4.6% to $24.25 in Tuesday trading. Scharf said he was extremely disappointed in the results.

“While the negative impact of the pandemic is unprecedented and many of our business drivers were negatively impacted, our franchise should perform better, and we will make changes to improve our performance regardless of the operating environment,” Scharf said in a statement.

Despite the loss, Scharf said that the bank’s capital and liquidity are strong. The bank attributed the loss, the first of any major U.S. bank during the pandemic, in part to a worsening outlook on the length and depth of the current economic downturn.

Industries that were acutely hit by the pandemic, like the oil business and commercial real estate, drove much of the weakness in the bank’s large corporate lending book. 47% of the bank’s past-due corporate loans were from the oil, gas and pipeline industry alone in the second quarter. That industry makes up only 3% of the bank’s outstanding commercial loans.

Lower interest rates meant net interest income was down $1.4 billion to $9.9 billion for the quarter, while more strength in the bank’s trading and securities businesses led to an increase in non-interest income to $8 billion, up $1.6 billion.

Despite attempts from management to clamp down on expenses, non-interest expense shot up $1.5 billion in the second quarter to $14.6 billion. Bonus pay to frontline employees and other pandemic-related expenses helped drive expenses higher, offsetting declines in spending in areas like technology, travel, entertainment and advertising.

Coming cutbacks

The bank has now set aside $12.4 billion in the past two quarters to financially prepare for the thousands of businesses and consumers who will default on their loans because of the economic effects of the coronavirus. Much of the financial carnage has been delayed by a mammoth federal stimulus program that pumped money into the pockets of consumers and businesses.

Of major U.S. banks, Wells Fargo has struggled the most with the impact of the coronavirus on the U.S. economy. Scharf, who started in October, was in the midst of planning a vast realignment of the bank when the virus hit. Before his arrival Wells Fargo had regularly lost ground in many of its lines of business to competitors JPMorgan Chase and Bank of America.

A growth cap imposed on the bank by the Federal Reserve as a result of its sales scandal didn’t help, but Scharf also criticized bloated expenses. Wells Fargo employs vastly more people than its competitors, with a total headcount of 263,000. Bank of America, which is roughly similar in size, employs 208,000. The bank employs 27,000 people in Charlotte, a result of its 2008 purchase of Wachovia.

“They have to cut headcount,” said Ken Leon, global director of equity research at CFRA Research. “They’re likely to have to do cost cuts across the board for all businesses.”

While other large banks consolidated and got more efficient in the last few years, Wells Fargo actually got more bloated, as it grappled with federal regulators coming down hard on the bank because of its fake-accounts scandal. That meant that coming into the pandemic, the bank was not on as near a good footing as its peers, Leon said.

Scharf, though, is not known for rash moves, and his record indicates that he will make the changes over a long time frame. $10 billion is still a very large number, and getting rid of that much in expense will likely mean cuts to the bank’s core businesses, like its retail banking and auto lending, according to Leon.

“That just seems crazy and unpatriotic in this moment of economic crisis,” said Nick Weiner, the lead organizer at the Committee for Better Banks, which is trying to unionize the industry. With the pandemic continuing to rage across the U.S. and expanded unemployment benefits soon to end, it could weaken Wells Fargo’s ability to help struggling customers and increase unemployment, he said.

“Banks are fortunately in a place where they are stable. They should be doing as much as they can to be keeping people in their homes and cars and out of default,” he said.

Branches will go

Wells Fargo also has the largest branch network of any American bank. That branch network, already shrinking, is among the first to see cuts.

The bank plans to close 65 branches across the U.S., according to filings the bank made in the last two weeks with the Office of the Comptroller of the Currency. Some closures are individual branches in small towns like, Godley, Texas, and others are broader reductions in large urban areas, like the closing of 10 branches around Phoenix.

On a call with reporters, CFO John Shrewsberry said that the eventual “glidepath” for the branch network would cut the number of branches to 4,000, from the current 5,400.

Areas of the bank handling ongoing regulatory issues, like risk and audit, are unlikely to see cuts in the short term. Over time, though, every corner of the bank will be scoured for savings. Spending on third-party services, which Scharf called “extraordinary,” will come down as well.

“We have spans and layers which are well beyond what I’ve seen at other places and makes us a very, very inefficient company,” he said.

Wells Fargo’s big bank peers, which all report earnings this week, had mixed results Tuesday. JPMorgan reported earnings Tuesday that beat Wall Street’s expectations, driven by strong trading revenues that offset the $10.5 billion it set aside to prepare for coming defaults. Citi saw profit drop 73%, and its shares fell. Charlotte-based Bank of America and Truist report earnings Thursday.

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©2020 The Charlotte Observer (Charlotte, N.C.)

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