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Wells Fargo Has Its Issues, But the Bank Appears to Be Making Progress

By Bram Berkowitz – Sep 13, 2020 at 6:00AM

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The bank recently updated its risk structure, rolled out a new no-overdraft bank account, and began to cut costs, among other initiatives.

Wells Fargo's (WFC -3.33%) stock has been more than cut in half this year, and for good reason. Already struggling with regulatory issues from its phony-accounts scandal in 2016, the bank was done no favors by the novel coronavirus pandemic. After the second quarter, the bank reported a loss of $2.4 billion and trimmed its dividend by about 80%. But on Wells Fargo's most recent earnings call after the bad performance, CEO Charlie Scharf said, "Whatever sense of urgency existed before is going to be small relative to what it is going forward."

The bank does seem to have taken this to heart, making some progress recently on issues ranging from cutting expenses to launching initiatives to get into better standing with regulators. Let's take a look at what the company has done and how these initiatives could help get the bank's stock trending upward.

The front entrance of Wells Fargo.

Image source: Wells Fargo.

On the regulatory front

The biggest impediment for Wells Fargo is the $1.95 trillion asset cap the Federal Reserve imposed on it in 2018 as a result of the bank's phony-accounts scandal. Wells Fargo is right up against this cap, which makes it hard to generate revenue. In a low-rate environment, like the one we're in today, banks normally need to originate a higher volume of loans to offset their smaller margins. According to Bloomberg, the asset cap has now cost Wells Fargo roughly $4 billion in profit, not to mention all the money the bank is spending to get the cap removed.

While there is no indication when the Fed will remove the asset cap, Wells Fargo is working to enhance its regulatory infrastructure to show regulators it will not make the same mistakes again and that it will have a system in place to catch malfeasance before it happens.

In mid-August, the bank hired Paula Dominick, who previously worked at Credit Suisse, as its new chief compliance officer. The bank also hired five new chief risk officers, and before that hired other new risk officers. Ultimately, Wells Fargo will have a chief risk officer to oversee every division inside the bank: consumer and small business banking, commercial banking, asset management, capital management, enterprise testing and validation, and consumer lending. This shows that the bank is clearly investing in its regulatory framework.

Other promising efforts

Wells Fargo is also making other efforts that don't necessarily attack the asset cap issue but will likely be looked upon favorably by regulators. At the beginning of the month, Wells Fargo released a new checking account with no account minimum and no overdraft or insufficient funds charges, which occur when account holders withdraw or transfer more money than what's available in their account. The account costs $5 per month, but account holders ages 13 to 24 are exempt from the fee.

Additionally, Wells Fargo has made progress on diversity. It recently came to terms with the U.S. Department of Labor to pay $7.8 million in back wages after being accused of discriminatory hiring practices. The bank will also hire 580 of the people impacted by its alleged discriminatory hiring practices to work as tellers, personal bankers, customer sales and service representatives, and administrative support positions. Wells Fargo also promised to increase Black leadership at the bank to 12% of senior leadership, double from what it is now, according to Bloomberg.

While these may not solve all of Wells Fargo's regulatory issues, they certainly show regulators it is serious about being part of the solution when it comes to other major issues in banking.

Cutting expenses

The bank has also resumed layoffs. Sources told Pensions & Investments that Wells Fargo could ultimately end up firing up to 25% of its workforce once all total planned layoffs are completed.

Layoffs are never easy, but the fact that the bank has begun the process amid the pandemic shows investors and analysts that it is serious about getting expenses down. On its most recent earnings call, Scharf told analysts that the bank is ultimately looking to reduce annual expenses by $10 billion. That's a big amount when you consider the bank is enhancing its regulatory infrastructure and has also said it needs to significantly invest in technology. Still, layoffs and branch consolidation will be inevitable steps in any plan to cut $10 billion in expenses, so it's good to see the bank not wasting any time.

Wells Fargo can be a winner again

While there is still much work to do on the asset cap and expense structure, along with other issues at the bank, Wells Fargo can be a good investment again. The most important thing for the bank is to get the asset cap removed so it can grow again and ultimately get back to generating the type of revenue it should be. If it can cut $10 billion in annual expenses within a reasonable time frame, that will also help in getting the bank back even with its competitors. With all the pain the bank has seen the past two quarters, it's good news that Wells Fargo can show progress on some of these initiatives while also dealing with the pandemic.

Bram Berkowitz has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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