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Wells CEO concedes 2018 another rehab year; growth elusive

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Wells CEO concedes 2018 another rehab year; growth elusive

Wells Fargo & Co.'s CEO said loan growth at the embattled bank he runs could lag the industry in 2018 and that the timing of his much-touted aim to improve the company's efficiency remains unknown.

President and CEO Timothy Sloan has repeatedly promised to lower Wells' efficiency ratio — expenses as a share of revenue — from above 60% into a range of 55% to 59%. At a May 31 conference hosted by Sanford C. Bernstein, Sloan said that he sees 55% as reachable.

The ratio, however, stood at 64.9% at the close of the first quarter, and Sloan echoed previous Wells executive comments this year in saying that the long-term goal is just that: long term. "When that exactly occurs," Sloan said of the sub-60% ambition, "I don't know for sure."

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Wells CEO Timothy Sloan

Last year, Wells had targeted 2018 as the year for notable efficiency improvement, given an ongoing effort to reduce expenses by $4 billion. But roughly half of those savings — to be culled by the end of 2019 — will get reinvested into the company, notably including spending on technology infrastructure and risk management. Risk controls, or the lack thereof, are at the heart of Wells' unique challenges to boost lending and, by extension, lift revenue enough to help the efficiency ratio.

The San Francisco-based bank has struggled to attract new customers and grow lending in key areas such as commercial real estate and home equity amid intense regulatory scrutiny and a series of public rebukes that date to September 2016, when authorities fined the bank for allowing its retail staffers to open millions of phony accounts. The bank also faces accusations, legal challenges and regulatory punishments related to mortgage and auto insurance abuses as well as unethical treatment of wealth management clients.

Regulators this year slapped an additional $1 billion in fines on Wells, and the Federal Reserve ordered the bank to limit its asset size at the level it finished 2017 — an unprecedented admonition that further hinders Wells' ability to grow revenue-generating operations.

Wells' 2017 top line was flat with the previous year, and in the first quarter of 2018, it declined nearly 2% from a year earlier.

"The revenue side, clearly, is the struggle at this point," Scott Siefers, a Sandler O'Neill & Partners analyst who covers Wells, said in an interview.

First-quarter total loans at Wells fell from the previous quarter and from a year earlier. Siefers noted that the banking industry as a whole has managed only modest loan growth so far this year, and the broader trend does factor into Wells' challenges. But, he said, reputational hits and regulatory pressure continue to impose added burden on Wells.

David Allaire, a portfolio manager at Mystic Asset Management Inc., which invests in big banks, said in an interview that Wells has an enviable national footprint and a sprawling array of services that it could capitalize on to increase revenue. But the question is, he said: When will the bank emerge from the shadow of scandal?

"That dark cloud still lingers over it," Allaire said. "[Wells] needs a catalyst, something to get the positives going. I don't see what that is yet."

Sloan emphasized that Wells has made substantial improvements over the past 20 months, from sweeping management and risk-control changes, to elevated employee training and new compensation structures aimed at motivating retail staffers to improve customer service. But, he said, "We certainly have more work to do."

Speaking at a separate conference earlier this week hosted by Deutsche Bank, Wells CFO John Shrewsberry told investors that the bank's internal examination of its sales practices is "virtually complete." He said, however, that Wells cannot claim "mission accomplished."

"I don't think you're going to hear those words," Shrewsberry said. "We're just going to keep trying to get better all the time."