(Reuters) - Wells Fargo & Co (WFC.N) doubled its cost-cutting target on Thursday after seeing expenses soar in the aftermath of a sales scandal that the third-largest U.S. bank is still trying to recover from.
But the move, detailed at Wells Fargo’s investor day, failed to impress Wall Street, because management also indicated that revenue growth is suffering from the scandal, which involved employees creating as many as 2.1 million unauthorized accounts in customers’ names to hit sales targets.
The San Francisco-based bank’s stock was down 1.7 percent at $53.81 in afternoon trading.
Wells Fargo plans to reduce expenses by another $2 billion through the end of 2019, on top of a $2 billion cost-cutting target management previously announced.
The cuts come after repeated questions from analysts and investors about why Wells Fargo was not doing more to reduce costs, which have been high by some measures when compared to U.S. banking rivals.
But the scandal has only increased costs, as the bank has tried to fix practices internally and respond to regulatory inquiries and public backlash.
During the investor day event, executives said they understood investor concerns and would take action.
Chief Executive Tim Sloan used the word “unacceptable” at least twice, in reference to prior sales practices and expense levels. Management had been trying to keep expenses in a range of 55 percent to 59 percent of revenue, but in the first quarter that ratio soared to 62.7 percent.
“Operating at this level is completely unacceptable,” Sloan said.
As Chief Financial Officer John Shrewsberry began his presentation, he joked to the crowd: “Raise your hand if you’re interested in hearing about expenses at Wells Fargo.”
He said the bank plans to get back into its targeted ratio in the coming years.
The sales abuses in Wells Fargo’s branch banking operation led to a $190 million regulatory settlement, launches of other government probes, the firing of several bankers, the departure of CEO John Stumpf and shareholders offering scant support for most directors at the bank’s annual meeting last month.
Nearly all of the executives speaking on Thursday, including Sloan, are in new positions entered after the scandal erupted in September. Wells Fargo’s investor day is typically a biannual event, but management held it a year early to provide more information about how they are running the bank.
Sloan and his deputies indicated that the scandal had impacted revenue, either because some customers may be less inclined to do business with the bank or because reforms to business practices have hurt sales.
For instance, Wells Fargo has changed pay structures so that instead of being incentivized to boost sales figures, employees are encouraged to deliver products and services customers actually need. While executives have described such reforms as necessary, they may also be hurting revenue.
“We had an incentive program and high-pressure sales culture in our community bank that drove behavior that was at times inappropriate and inconsistent with our values,” Sloan said, noting that management “took too long to appreciate seriousness of the problem.”
Wells Fargo bankers are getting fewer referrals from branches for personal loans and home-equity loans, said Franklin Codel, an executive in the consumer lending unit. That has led to a 3 percent decline in business, though trends appear to be stabilizing, he said.
The credit card business has also been hurt by the scandal, said Avid Modjtabai, who heads Wells Fargo’s payments, virtual solutions and innovation group. The rate of new credit card account openings has recently picked up, but Modjtabai did not say when she expects the business to fully recover.
Overall, Wells Fargo expects net interest income to grow in the low-to-mid single percentage points this year, which some analysts characterized as disappointing, as were executives’ assertions that Wells will not hit its cost efficiency ratio this year.
The new cost-cutting guidance fell roughly in the middle of analyst expectations.
A big chunk of the savings will come from Wells Fargo’s plan to close 450 branches in 2017 and 2018, roughly 10 percent more than its previous target.
Wells Fargo has been slower to cut branches than rivals like Bank of America Corp (BAC.N) or Citigroup Inc (C.N). It is a quick way to slash expenses, though some banks, including JPMorgan Chase & Co (JPM.N), have been cautious about trimming branch networks because doing so can hurt revenue.
Through Wednesday’s close, Wells Fargo’s shares had risen 6 percent over the past six months, lagging gains of 14.1 percent for JPMorgan and 28.7 percent for Bank of America.
Reporting by Dan Freed in New York; Editing by Lauren Tara LaCapra and Meredith Mazzilli