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Despite weak top line, Wells still looks for sub-60% efficiency ratio in '18


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Despite weak top line, Wells still looks for sub-60% efficiency ratio in '18

Wells Fargo & Co.'s third-quarter revenue fell and its expenses rose as the aftershocks of a sales scandal continued to hurt the company, pushing its efficiency ratio well above its target. But Wells' finance chief said the banking giant still looks for substantial improvement in 2018.

The San Francisco-based company reported Oct. 13 that its third-quarter revenue declined about 2% from a year earlier to $21.9 billion, hurt by lower consumer loan volumes and weaker levels of fee income.

Both were tied to regulators' move in September 2016 to fine Wells after learning that it allowed retail employees to open millions of phony accounts in customers' names over several years. Wells has since estimated that up to 3.5 million accounts were affected over a roughly eight-year period. It has also discovered other problems in auto insurance and other products.

Wells' noninterest expenses, meanwhile, rose 8% to nearly $14.4 billion from a year earlier.

Costs rose in large part because of a $1 billion charge linked to mortgage-related regulatory investigations that date to the financial crisis. Wells previously disclosed these issues. But these did not account for all of the $1.3 billion in operating losses that the bank said dragged on third-quarter expenses. Legal and other costs tied to the scandal also dinged the company.

Its efficiency ratio — expenses as a share of revenue — climbed to 65.5% from 61.1% at the start of the third quarter. The latest figure was well above the company's targeted ratio of 60% to 61% for this year.

Wells executives noted they are in the midst of a $4 billion expense-reduction effort that should help improve efficiency. The company expects to achieve half of the savings by the end of 2018 and the remainder by the end of 2019. The first $2 billion, CFO John Shrewsberry said on a call to discuss earnings, will get reinvested in new technology and other expected drivers of revenue, while the latter $2 billion is expected to drop straight to the bottom line.

The goal is to bolster both sides of the efficiency ratio, with a hope of lowering it below 60% next year and further the following year.

"It is definitely our goal to be at 59% or below at some point next year," Shrewsberry said.

With their questions, analysts on the call expressed doubt on the revenue side, given the third-quarter weakness and no certain drivers of major improvement. Shrewsberry said further Federal Reserve interest rate increases could help push up interest income, as would loan growth, though he conceded neither were sure things.

Investors were initially dubious. Shares of Wells fell more than 3% in morning trading Oct. 13 after the earnings release.

Wells reported third-quarter net income applicable to common shares of $4.18 billion, or 84 cents per share, down from $5.24 billion, or $1.03 per share, a year earlier.