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Wells Fargo's top line remains under pressure from scandal

Speaking to analysts and investors May 10, Wells Fargo & Co. executives touted the bank's national footprint, its investments in new technology, its long-term growth potential and an efficiency effort punctuated by $4 billion in cost-cutting over this year and next. But notable near-term revenue growth remains an uncertainty.

Revenue growth is a key item of interest for Wall Street because it would demonstrate that the San Francisco-based bank is attracting new customers after a 20-month struggle on that front. The company has toiled amid public doubt and intense regulatory scrutiny since September 2016, when authorities fined the bank for allowing its retail staffers to open millions of fake accounts.

The bank has faced a string of other customer-service woes in the months since. These range from mortgage and auto insurance abuses to allegations of unethical treatment of wealth management clients.

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Wells CEO Timothy Sloan

Source: Wells Fargo

Wells recently agreed to pay $480 million to settle a lawsuit that claimed the bank misled shareholders about the fraudulent accounts. Regulators this year fined the bank $1 billion for misdeeds including the mortgage and auto problems, and the Federal Reserve ordered the bank to maintain its asset size at the level it finished 2017 — an unprecedented rebuke that makes it more difficult for Wells to grow revenue-generating operations.

President and CEO Timothy Sloan said during a daylong meeting May 10 in Charlotte, N.C., that Wells' work to show Fed officials that the bank has bolstered risk management and internal controls is likely to carry into 2019. Executives had previously targeted late 2018.

Sloan said Wells is "very far along" in satisfying its regulators' demands, however, and he said the bank would go beyond those expectations to impress customers and would-be clients.

"Our fundamental business model is still intact, and we can generate strong returns while becoming more efficient," he said.

But executives shied away from predicting the timing of new revenue growth, and Sloan expressed frustration with added challenges and the spate of negative public attention that has shrouded the bank since late 2016.

"It's been very tiresome for us, to be honest with you," Sloan said.

Against that backdrop, loan and fee-income growth have proven difficult. Total revenue was flat in 2017, and in the first quarter of 2018, it declined nearly 2% from a year earlier.

Net interest income as a percentage of total revenue increased to 56% in 2017 from 54% the previous year. But that in part reflected a decline in noninterest income. And Wells said May 10 that its net interest income likely will prove only stable in 2018, as higher rates start to put more pressure on deposit costs and as the bank is challenged to grow total loans.

First-quarter total loans fell from the previous quarter and from a year earlier. Its big-bank peers — JPMorgan Chase & Co., Bank of America Corp. and Citigroup Inc. — all generated year-over-year loan growth in the first quarter, according to an S&P Global Market Intelligence analysis.

Scott Brown, chief economist at Raymond James, said that big banks including Wells got a substantial boost in the first quarter from federal tax reform, which lowered tax bills and enabled companies to push some of the savings to their bottom lines.

But, Brown said in an interview, the likes of Wells will need to find new earnings drivers as 2018 wears on, including loan growth.

"The key question for investors now is, what's next to boost earnings? If you don't have an answer, that's a problem," Brown said.

Mike Matousek, a trader at U.S. Global Investors who tracks big U.S. banks, said general apprehension about Wells spans investors, regulators and bank customers.

"People are nervous because they just don't know what's going to happen next," he said in an interview. Wells "just has to hope nothing else is going to come out of the closet any time soon."