Wells Fargo is a disaster that is forced to cut its coveted dividend. During the Great Recession, Wells Fargo was so strong that it was one of the last banks to touch its dividend. Today is the first.
“We are responsible for the position we are in,” Wells Fargo’s CEO told analysts on Wednesday after detailing what he called “clearly a very poor quarter for us.”
Wells Fargo still in penalty box with Fed
But Wells Fargo cannot because of the asset limit. That’s why its net interest income, a key profitability metric for banks, fell 13% quarter-over-quarter. JPMorgan, on the other hand, was down just 4%.
Scharf acknowledged that these “restrictions” have limited the bank’s ability to compensate for the pain of low rates. But he did not blame the Fed, which has refused to lift the sanctions until Wells Fargo cleans up.
“The bottom line exists because the leadership did not supervise or build the proper infrastructure for the company,” said Scharf. “Our low financial performance is because the leadership did not make the difficult decisions necessary.”
Wells Fargo has focused on these issues by modernizing its corporate risk operation, including through hiring external executives.
Still solving customer disputes
But it’s not just about the asset limit.
Wells Fargo’s operating losses increased by $ 755 million in the second quarter due to “higher customer remediation accumulations for a variety of issues and higher litigation accumulations.”
In other words, the bank is still paying the price for its history of scandals in the form of customer refunds and legal settlements.
Which of Wells Fargo’s many is not entirely clear controversies to which these costs refer.
When asked by CNN Business what “remediation” refers to, John Shrewsberry, chief financial officer of Wells Fargo, said during a conference call with reporters that it is not directly related to the millions of fake accounts that were opened.
“It is a variety of things that have been part of our public disclosures in recent years,” he said.
Shrewsberry said the new Wells Fargo administration has reviewed pending issues and is taking a “more generous vision” on behalf of customers to “come to a conclusion more quickly.”
It is surprising that almost four years after the Wells Fargo scandals broke, he is still trying to resolve disputes with customers.
“I think the worst is over,” said Shrewsberry. “It should be the end from my perspective.”
Wells Fargo deep dividend cut
But the pain is not over for employees and shareholders.
Wells Fargo expects to cut its dividend by 80%, far more than analysts had anticipated.
“We are extremely disappointed in taking this step and understand that many depend on this stream of income,” Scharf said during the call.
KBW analyst Brian Kleinhanzl warned customers in a note Tuesday that the Wells Fargo dividend could be further reduced because “there is not much room to breathe.”
KBW slashed its earnings estimates at Wells Fargo, not just for this year, but for 2021 and 2022 as well. And warned of “higher downside risk” if the asset cap doesn’t rise by this date next year. Fed President Jerome Powell has been very critical of Wells Fargo.
“The fundamental short-term perspective remains more challenged” for Wells Fargo than its peers, wrote Kleinhanzl.
Here come the job cuts
Not surprisingly, Wells Fargo’s struggles could force a serious belt tightening.
“We have been extremely inefficient for far too long,” said Scharf.
The Wells Fargo chief said the multi-year cost-cutting effort will start soon, with the goal of making the bank as efficient as its peers by cutting around $ 10 billion in expenses.
Part of that will be done by closing branches. Wells Fargo listed 5,300 retail branches at the end of the second quarter, down from a peak of 6,300 years ago, and that number could eventually drop to 4,000.
But Shrewsberry, Wells Fargo’s chief financial officer, said branches and front-line workers will not play a “big role” in reducing costs because they are not the most expensive parts of the company.
Still, he acknowledged that job cuts are looming.
“A big part of this will ultimately be people, because a big part of our spending structure is personal,” said Shrewsberry.
That means Wells Fargo’s financial woes will finally punish employees.
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