Wells Fargo and U.S. Bancorp: Tax Reform and Other Concerns

The new tax law has implications for Wells Fargo (WFC -1.54%) and U.S. Bancorp (USB -1.36%), both immediately and in the form of an ongoing benefit. In this clip from Industry Focus: Financials, host Michael Douglass and banking specialist Matt Frankel discuss the effects of tax reform on these commercial banking giants, as well as what longer-term effects Wells Fargo's numerous scandals could have.

A full transcript follows the video.

This video was recorded on Feb. 2, 2018.

Michael Douglass: Let's talk about taxes, because that's the story of the day with all the big banks.

Matt Frankel: Yeah. Taxes really made fourth quarter bank earnings a real chore to read. Some banks had a big net charge-off. Citigroup, for example, had to take over a $10 billion hit in the fourth quarter, whereas some banks had a tax benefit. Wells Fargo happened to be one of the few that had a big tax benefit. They carry deferred tax liabilities on their balance sheet. And now that the corporate tax rate is 21% as opposed to 35%, those are less of a liability. So, they got to take a nice little credit this quarter. So, ignoring 2017's tax rates, just because you can't really tell what's what, in 2016 and the years before that, Wells Fargo paid an average of a little over 31%. U.S. Bank's is closer to 27%. But, the new corporate tax rate should be a tremendous boost to them and most of the other banks. Wells Fargo said in their earnings report they expect to pay 19% in 2018. Now, the difference between 31% and 19% when you're talking about a company that's generating $20 billion or whatever it is of income a year, telling them they get to keep an extra 12% of that is a big deal.

Douglass: Yeah. It absolutely is. That's going to be a big plus for banks going forward, as well as, of course, as interest rates increase, as we've already discussed. Let's talk a little bit about Wells Fargo now. If you watch or read or hear the news, you're probably familiar with the Wells Fargo scandals, the fake account scandal in particular, where, basically, a lot of people were signed up for products that they didn't need and also didn't know they had by Wells Fargo staff who were trying to meet pretty aggressive sales quotas. That not only looked quite bad and resulted in fines and class action lawsuits and a lot of money paid out, but it's also meant that Wells Fargo has really shifted its culture, or at least is attempting to. They've gotten rid of the aggressive sales targets, and they're trying to figure out how to generate really strong profitability without the incentives that cause this kind of cheating. And frankly, that means the bank is kind of in a transitional year, probably a transitional few years, as it tries to figure that out. For me, that's definitely a big concern for the bank in the near term.

Frankel: It is. Their management openly acknowledges that they're not going to be able to sell eight different banking products to every customer anymore, and this could be a drag on earnings. They're also trying to be on their best behavior right now because of all the scandals, so they're really not being pushy on Wells Fargo customers. Walking into a bank branch, I get so many fewer sales pitches now that all this has happened. But, going forward, they're doing a good job of trying to compensate in other ways. They're trying to reduce expenses on an ongoing basis by $2 billion this year and another $2 billion next year. So, it's going to be a matter of whether that's enough to make up for what they're losing by getting rid of the aggressive sales practices. If they are successful at making up for it and maintaining their 11% return on equity and fantastic asset quality, they could look like a great turnaround story. But it's kind of a work in progress. Like you said, they're in a transitional period right now.