Wells Fargo could be headed for a comeback

Is the worst over for Wells Fargo? Some analysts say yes, based on numbers the San Francisco bank released with its fourthquarter earnings report Friday. But others remain cautious, saying the bank could face more regulatory and reputational problems.

One thing Wells has going for it is the macroeconomic backdrop. Interest rates are going up, which is good for most banks because they can increase loan rates faster than their deposit rates. The job market is robust and credit quality “is excellent,” said Morningstar analyst Jim Sinegal. In addition, the new Congress and administration are expected to reduce banking regulations.

“There are a lot of good things going on for the sector as a whole. Wells may not be able to take advantage of them because they are not selling as they once were, and putting costs back onto the

business as other banks are cutting back on them,” Sinegal added.

Earlier last week, Wells Fargo announced a new compensation structure for its retail banking employees. The company ended product sales goals in October, after disclosing that branch workers may have opened more than 2 million deposit and credit card accounts without customer knowledge or approval.

In the future, performance will be based on things like customer service, increase in primary customers, household relationship growth, risk management and team rather than individual performance.

The bank also said that employees will get more of their wages in salary rather than bonuses, and increased its lowest wage to $13.50 per hour, up from $12 per hour. That’s considerably higher than the national minimum wage of $7.50. Wells Fargo will pay a higher base wage, up to $17 per hour, depending on factors such as experience and geography, a spokesman said.

In a major cost-cutting move, Wells Fargo announced Friday that it will close 200 branches this year and at least 200 in 2018. Last year, it closed 84, mostly in the second half. It expects that many of the closed banks will be near another branch, so there won’t be a large revenue impact, and the full year of savings won’t occur until one to two years after the branch has closed.

Wells Fargo’s monthly retail banking activity report, which it started publishing in October, shows that the impact of the account scandal could be waning.

For example, customers opened roughly 600,000 checking accounts in August, 400,000 in September, 300,000 in October, 300,000 in November and 300,000 in December. (The bank did not provide exact numbers.) Although the December number was still down 40 percent from the previous year, it was up 2 percent from November following month-tomonth declines the previous two months.

Applications for credit cards were down 43 percent in December from the same month in 2015, following declines of 45 percent in November and 50 percent in October.

In its earnings release, Wells said that auto loan originations were $6.4 billion in the fourth quarter,

down 21 percent from the previous quarter and down 15 percent from 2015. But Gerard Cassidy, an analyst with RBC Capital Markets, said that drop has more to do with market and industry conditions and less to do with the scandal.

JPMorgan Chase said Friday that its auto loan and lease originations were $8 billion in the fourth quarter, down from $9.3 billion in the third quarter and $9.2 billion the previous year.

The scandal “is certainly having an impact, nobody denies that,” Cassidy said. But “the decline in applications for different types of products is now slowing.” Wells management “thinks the peak has been reached in that negative number. Each subsequent quarter, we expect them to bring that back to a positive number. It’s a work in progress.”

That reflects a comment Wells Fargo CEO

Timothy Sloan made in a conference call with analysts Friday, when he said the bank has seen “what seems to be an inflection point in the midst of the fourth quarter.”

Sinegal also thinks that the worst could be over, with customers, regulators and politicians. “It’s fair to say we have seen the trough. It’s been a while since (news of the scandal) was on the front page every day,” he said. “To the extent that antibank politicians are still around, you’re going to hear about it. But they are not going to have as much sway as they did prior to the presidential election.”

FBR analyst Paul Miller is not so sure. “I still think it’s going to play out over time. There is less of a shock factor, relatively speaking, now that the Department of Justice has changed.”

But, he added, “They still have a ways to go with regulators. There could be another shoe to drop. It won’t be as tough as it would have been if Hillary (Clinton) won. But the Republicans still have to play tough with the banks.”

His biggest concerns are limits that regulators put on Wells Fargo after it failed a government stress test last month, and what an independent audit of the scandal ordered by the bank’s board might reveal.

On the bright side, despite its troubles, “They are still earning money and getting (return on equity) in the double digits,” Miller said. That explains why Wells Fargo’s stock was up 1.5 percent Friday, far outpacing the overall market and other big banks.