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SNL: Analysts look for new growth cues from Wells Fargo

By Kevin Dobbs

When Wells Fargo & Co. reports second-quarter earnings next week, analysts will look for signs that it is increasing profits after a lull in growth that followed the bank’s 2016 sales-tactics scandal.

Regulators last September said they had fined the San Francisco-based bank after learning that bank staffers opened millions of deposit and credit card accounts for customers without their permission. New account opening dropped in the ensuing months, hurting revenue growth, and both legal and regulatory costs rose. The result: Wells posted fourth-quarter 2016 and first-quarter 2017 earnings that were below year-earlier levels.

But an S&P Global Market Intelligence analysis of Wall Street’s expectations found that, on average, analysts expect Wells to post revenue and earnings per share figures that are higher than the previous quarter and a year earlier. “They have gone through a lot of pain, but I think they can now start focusing on growing earnings again,” Vining Sparks analyst Marty Mosby, who covers Wells, said in an interview.

In June, Wells got a key nod of approval from regulators: After the bank passed an annual stress test designed to ensure it could navigate a financial crisis, Federal Reserve officials approved the bank’s plan to increase its dividend and stock buyback program. Both moves are signs of capital and overall strength, Mosby said. He added that the Fed’s nod indicates the effects of the sales fraud, while still hindering the company in terms of legal costs and lingering reputational damage, are temporary and starting to fade.

“It’s kind of a stamp of approval,” Mosby said of the Fed checking off on Wells’ capital deployment plan.

He said Wells had “ring-fenced” the sales issue and publicly outlined important steps it took to prevent such a debacle from occurring again, including changes to the way it pays and motivates retail bank employees.

“Ultimately, I don’t think it was really a threat in terms of what they asked the Fed for with their capital planning,” Mosby said. “I think this is the inflection point for Wells.”

Jon Winick, president of bank adviser Clark Street Capital and a long-time Wells observer, agreed. “Wells is so big that the damages aren’t going to be that impactful as far as their capital position,” he said in an interview. Regulators “are probably seeing that the actual cost of the Wells accounts issue is pretty low and quantifiable.”

Mosby anticipates that Wells will gradually rebuild sales levels in its retail bank over coming quarters. That, in concert with an ongoing cost-cutting effort, should help the bank shake off the aftershocks of the scandal, lower its efficiency ratio and gather notable earnings momentum in 2018. Mary Mack, head of Wells’ community bank division, said while speaking at a conference in June that the bank is continuously looking for new ways to increase efficiency, even while it is in the midst of carrying out a plan to consolidate 450 branches and reduce expenses by some $4
billion by the end of 2019.

Wells’ first-quarter efficiency ratio, which measures noninterest expense as a share of revenue, increased to 62.7% from 58.7% a year earlier. The expense reductions are part of an effort to bring the ratio back down below 60%, where Wells has historically operated.

Speaking at a separate June conference, Wells President and CEO Timothy Sloan said it was realistic to expect that the bank could bring the efficiency ratio into a range of 55% to 59% by next year.

Later that month, Wells said it would sell its commercial insurance business to USI Insurance Services LLC, an anticipated move aimed at reducing staffing costs in noncore business lines.

That sale, and perhaps others to follow, are the kinds of moves that, on top of branch consolidation, “will help Wells get the expense ratio down to their long-term target,” Mosby said. “I think they are getting on that path now and can really get things going again by 2018.”

Wells is slated to start big-bank earnings season July 14 along with JPMorgan Chase & Co., Citigroup Inc. and PNC Financial Services Group Inc.

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