Wells Fargo & Co. Treasurer Neal Blinde told investors that executives are successfully complying with an unprecedented Federal Reserve consent order but the process requires Wells to strike a unique balancing act of pushing deposits off its balance sheet without alienating customers.
The order, tied to a phony-account scandal that became public in 2016, limits the San Francisco-based bank's total assets to the level at which it finished 2017 — just under $2 trillion. It must contain its overall size until it proves to Fed officials that it has fully addressed flaws in its risk management and governance.
Several analysts and bank advisers have told S&P Global Market Intelligence that they are concerned that the process could last all of this year and into 2019, given that Wells' customer service woes have steadily mounted and spread into auto insurance, home lending and other areas. Wells said earlier this month that it discovered cases of erroneously charging fees in its wealth management business.
Wells has suggested that it could meet the Fed's demands by late September. But its ongoing problems could complicate that. "It is going to be difficult and time-consuming," Charles Wendel, president of Financial Institutions Consulting Inc., said in an interview.
But, at least early on, Blinde said Wells is off to a good start. Speaking at an RBC Capital Markets conference March 7, he said a seasonal outflow of certain deposits early in the first quarter is a positive development. That is because Wells is relying on reductions in deposits to help keep it both under the Fed-imposed cap and to allow it to at least modestly grow loans and other core business products this year.
He said that following the holiday shopping season late in 2017, retail customers turned earnings into deposits, and municipal banking customers did the same with tax receipts.
"That goes into the bank deposit accounts and creates a build in assets in the bank," Blinde said. But, he added, early in a new year, those inflows tend to leave the bank again as businesses fund their vendors and as municipalities and other customers make new investments.
"So as we sit today, we experienced that natural reduction in the balance sheet at the first part of the quarter," he said. "That puts us in a good position to be very purposeful in the way that we approach the cap."
But that does not mean it will be easy, Blinde said. As Wells enters the late stages of the first quarter, he said, the bank expects it will experience a seasonal build in deposits, as people and businesses tend to get federal tax refunds that they turn into deposits. That in turn creates a build-up "in cash and balance sheet size at the end of the first quarter."
As such, Wells is preparing to approach certain depositors and effectively encourage them to pull funds out of the bank for a brief stretch, given Wells' situation under the consent order. In some cases, this could be done simply by reducing what the bank pays on certain deposits, motivating short-term clients in particular to use other bank partners for more of their deposits.
"So think of international banks and central banks," Blinde said. "Deposit-taking in that category tends … to be very, very short-term in nature, sometimes not even 24 hours, just overnight deposits. And they are very price-sensitive," he said. These are financial institutions and they "understand what this means," he added, referring to the order.
But, Blinde said, Wells will have to strike a balancing act to push out certain deposits without damaging customer relations.
"In a perfect world, they see deposits move out temporarily and then return" when the Fed order is lifted, analyst Scott Siefers of Sandler O'Neill & Partners said in an interview. "All they can do is hope that it's not permanent. But, not having seen this kind of order before, I'm not sure we know how this will really work out."
