Wells Fargo trims expected hit from regulatory cap on assets

BOSTON (Reuters) – Wells Fargo & Co (WFC.N) on Thursday said a cap on the bank’s growth imposed by regulators after sales practices scandals would hurt earnings less than it thought this year, and forecast 2019 expenses below Wall Street expectations.

FILE PHOTO: A Wells Fargo bank sign is pictured in downtown Los Angeles, California, U.S. August 10, 2017. REUTERS/Mike Blake/File Photo

The lender is under Federal Reserve orders to keep its assets below $1.95 trillion until governance and controls improve, and said at its annual investor day that net interest income would remain flat in 2018.

Analysts were upbeat about the expense forecast and improved take on the fallout from the regulatory restrictions, but some had been hoping for more details on possible improvement in revenue.

“While we expect the market to view this financial outlook favorably, (portfolio managers) keep on telling us they need to see the negative headlines abate … and revenue growth to return,” Barclays analyst Jason Goldberg wrote in a note to clients.

Wells Fargo Chief Executive Tim Sloan said the bank is making plans to operate under the asset cap for the first part of 2019 and acknowledged “we have not executed as well as we could have” on compliance and risk oversight.

The bank previously expected the net income hit after taxes from the asset cap would be $300 million to $400 million, but lower deposit and loan growth gave it room under the limit and caused it to cut that figure to less than $100 million, Treasurer Neal Blinde said.

Well Fargo said net interest income, or the difference in what it pays for deposits and what it earns on loans, will likely be relatively flat in 2018 as lower earning assets and higher deposit costs offset higher interest rates.

The bank’s shares were up 1.3 percent in afternoon trading.

The bank forecast 2019 noninterest expenses of between $52 billion and $53 billion, excluding litigation and remediation items, slightly lower than analyst expectations of $53.2 billion according to Thomson Reuters I/B/E/S.

Wells Fargo Chief Financial Officer John Shrewsberry said the bank would not provide updated guidance on its efficiency ratio because it gave the expense component. Investors and analysts have closely watched for improvements in that key measure of costs per dollar of revenue since the sales scandal erupted in 2016.

Shrewsberry said under one scenario for 2020 it is possible the bank would have expenses of $50 billion to $51 billion, and revenue consistent with 2017 results, but cautioned that was not a formal projection.

Analysts had said they would be looking for signs of when revenues will stabilize after being hurt by weak lending and fee income and the Federal Reserve order.

Barclays analyst Goldberg noted that two profitability targets Wells Fargo gave on Thursday roughly met his expectations: a two-year return on equity of 12 percent to 15 percent and two-year return on average tangible common equity of 14 percent to 17 percent.

Mary Mack, senior executive vice president for community banking and consumer lending, said voluntary turnover among branch employees was nine percentage points lower in the first quarter of 2018 compared to the first quarter of 2014.

The attrition rate for consumer primary checking accounts has also fallen over the same period, she said. The sales scandal involved the unauthorized opening of customer accounts by employees, among other issues.

Mack said Wells Fargo is focused on helping customers solve specific problems, not just trying to sell new products.

“We evolved from being really nice. Right after the settlement we became the nicest bank in America,” she said.

Reporting by Ross Kerber; Editing by Meredith Mazzilli and Bernadette Baum

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