Wells Fargo CEO drama eclipses struggling business

By Wells FargoFOXBusiness

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Wells Fargo is conducting a high-profile search for its next CEO, but eclipsed by the recruiting effort is the lender’s flailing business operations amid rising competition from rival banks.

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Much of the attention on the San Francisco-based company over the past few years has been on its litany of regulatory scandals, federal settlements in the billions of dollars, fiery congressional hearings and the ousting of two top executives in three years.

But those headlines have only served to exacerbate the underlying troubles at Wells Fargo.

Wells “has major business problems. In the last [decade], the company has not been able to improve its real earnings,” Dick Bove, senior research analyst at Odeon Capital Group, previously told FOX Business. “It’s a company that’s in a lot of trouble.”

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Revenue in the lender’s signature consumer division fell nearly 9 percent in 2018. Now, Wells is facing intensifying pressure as competitors like JPMorgan Chase significantly expand their retail banking operations.

Meanwhile, earnings at its wholesale and investment banking division also declined through last year. Analysts say they don’t expect much improvement as the company looks for its new CEO, and once a successor is chosen the progress could be slow.

“It is unusual for a company of this size to run without a permanent leader; so there is an element of limbo at play,” Sandler O’Neill and Partners analyst Scott Siefers wrote in a recent note. “Despite the very public pressures on this company, it stands to reason that any outside leader brought in would receive at least some grace period from the company’s critics.”

Wells, along with JPMorgan Chase, will report its first quarter earnings for 2019 on Friday, giving investors both a glance into the firm’s continued turnaround efforts and an early look into the impact of the Federal Reserve’s recent interest rate hikes – which help to bolster profits at banks because it improves margins on loans.

The central bank has signaled it will take a more cautious approach to its monetary policy this year, potentially even cutting rates by the end of 2019.

TickerSecurityLastChange%Chg
JPMJP MORGAN CHASE & CO.113.78+0.04+0.04%
WFCWELLS FARGO & COMPANY47.65+0.30+0.63%

To improve its bottom-line, Wells has sought to cut billions of dollars in costs throughout its business sectors. The fourth-largest U.S. lender is eliminating roughly 26,000 jobs over the next few years and closing nearly 800 physical branches – part of a shift to online banking.

Earlier this week, the company announced it would sell its institutional retirement and trust business to Principal Financial Group for $1.2 billion, a relatively small deal for Wells and one that analysts are skeptical of providing much gain.

It has also scaled back involvement in potentially unprofitable businesses, like auto loans, and executives previously cited a drawback in call center operations as another potential option.

While the cuts drove an immediate profit bump, longer-term issues are raising concerns on Wall Street.

The lender’s loan business continues to decline, underscored by a 2.5 percent decrease in the consumer loan sector and a 50 percent drop in mortgage banking in the fourth quarter of 2018. The Fed’s recent interest rate hikes could be one reason for the declining mortgage lending. Meanwhile, average deposits in the three month period fell $42.7 billion.

The biggest near-term objective for Wells is convincing the Fed to lift the asset cap imposed on the bank in 2018, which appears likely to stay in effect for the next year.

“We continue to have very frequent and constructive dialogue with the Fed, and we’re both working towards the same goal,” recently departed CEO Tim Sloan told investors in January.

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Analysts expect Wells Fargo to report profits of $1.12 per share.