Wells Fargo Earnings Report: A Work In Progress

| About: Wells Fargo (WFC)


Wells Fargo & Company posted a 4.5 percent year-over-year increase in profits and generated a 11.95 percent return on shareholders' equity in the second quarter of 2017.

However, full confidence in the new leadership of the bank has not returned and lending numbers are down from a year earlier as loans have increased at other large banks.

Furthermore, there are still additional charges being absorbed by the bank from the earlier sales-practice scandal and further investigations remain.

Wells Fargo & Company (WFC) is basically a good, sound bank.

However, Wells Fargo is still going through a rough period adjusting from some bad leadership. I believe that the company will regain much of its past glory, but it is still going through a period where this needs to be confirmed.

The organization is still the most conservative large bank in the country, remaining the most “retail” character of all the bigger banks around. Its foundation continues to be the consumer and it still has the largest home mortgage portfolio in the private sector.

But it is still under new leadership following the sales-practice scandal that recently rocked the bank. The bank remains under a cloud to many customers and potential customers. Clouds like the one experienced by Wells Fargo takes time to clear. Bad management practices, even within only a segment of the business, must be removed… and this does not happen overnight.

In the second quarter of 2017, Wells Fargo earned return on shareholders’ equity of 11.95 percent versus an 11.70 percent ROE in the same quarter one year ago. The slight improvement in the performance came about in a number of areas not significant enough to mention with the exception of the investment banking division, which is not a very big part of the whole firm.

This overall performance is a good one compared with the results of other large commercial banks in the United States. Wells Fargo, throughout the financial crisis beginning in 2007, the Great Recession and subsequent recovery, maintained the highest ROE of any of the largest banks in the US, although it has not returned to the 15 percent or higher return achieved earlier.

This seems to be to be an acceptable performance, given all that Wells Fargo… and the industry… have gone through. At its core, Wells Fargo is a pretty solid institution and when customer confidence returns, the basic drivers of a higher ROE should be the same as before the scandal.

However, Wells Fargo is still going through a transition period with the new leadership of the bank and we must still be cautious about the longer-run performance of the new management team, a team that came from within the organization. It is difficult for a troubled organization to fully change the culture of an organization and this is why I still keep a “wait and see” attitude towards the bank.

There remain hurdles that must be overcome.

First, Wells Fargo is still experiencing fallout from the legal battles that took place. In the second quarter, there were additional charges of $110 million related to the scandal. And, the bank faces continuing investigations that will uncover… well, we don’t know what yet. So the book has not been closed on the leadership problem

Second, Wells Fargo customers seem to be reluctant to fully commit to the bank at this time. There is a reluctance to deal with the bank because of past issues.

For example, lending is down, year over year, by about $1 billion. This is taking place when lending is increasing at a pretty good pace at other large banking institutions.

This drop off has been particularly noticeable in the mortgage area, one of the bank’s strongest areas. Mortgage banking fee income dropped 19 percent, year over year.

Third, the bank has lost more than 500 brokers since the legal agreement was reached in the cross-selling scandal and this situation has not yet fully settled down. Analysts talk about the difficulty institutions have in attracting new clients when issues like this still hang over the organization.

Bank turnarounds take time. And, although the Wells Fargo situation is not going through what might be called a "classical" bank turnaround, to me, the restructuring of an organization’s culture is a turnaround. A "classical" bank turnaround has to do with restructuring the business plan, getting rid of unproductive divisions, and changing the customer base.

This is why the drivers of a higher ROE are basically in place.

In dealing with culture issues, bank management is dealing with concerns about morality, integrity, and employee attitudes. The restructuring can only be termed a success if employee satisfaction is attained and market confidence is restored.

At the present time, it does not appear to me that a full return of confidence has been achieved. Potential investors need to watch for the decline in the legal and regulatory efforts that still continue to hang around the scandal issues. They also need to watch for a return of the bank's basic business, indicating a returning confidence in the bank's business practices. And, they need to see that the employment situation in the bank stabilize along with employee comfort with management practices.

Wells Fargo leadership seems to be on the road to redemption, but it has not fully gotten back to the previous level. Operating performance, therefore, will not return to potentially attainable levels until complete confidence returns.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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Tagged: , Money Center Banks, Earnings
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