USA TODAY International Edition
No rest in sight for weary Wells Fargo
Its CEO gone, bank sure to face onslaught over Q3 report Friday
Wells Fargo, reeling from a widespread scandal that attracted ire from lawmakers and cost its CEO his job, will face a barrage of questions again Friday as it reports quarterly profit results.
JP Morgan Chase and Citigroup are also reporting thirdquarter earnings Friday.
But bank stock investors will be paying particular attention to Wells Fargo as the company elaborates on Chairman and CEO John Stumpf’s sudden departure Wednesday and the extent of the losses from and plans to address the “cross- selling” scandal that has rocked the San Franciscobased company. Its employees allegedly created upwards of 2 million phony accounts without customers’ consent, triggering federal investigations, congressional inquiries and lost business.
The large banks’ financial statements and executives’ conference calls also will be parsed for the effects of lingering global challenges — such as Brexit, the sluggish European economy, Deutsche Bank’s recent woes and the rising Libor interest rate — that cloud otherwise resilient domestic economic conditions. The overall picture undoubtedly will be part of the calculation used by Federal Reserve policymakers looking to possibly raise interest rates in December for the first time this year.
“During the third quarter, banks faced another challenging operating environment, with uncertainty and volatility arising after the Brexit vote and lackluster global economic growth continued,” Brian Kleinhanzl, an industry analyst at Keefe, Bruyette & Woods, wrote in a recent note to investors.
Stumpf’s surprising departure — he had insisted on staying even after some critics, including Sen. Elizabeth Warren, D- Mass., called for his resignation — thickens the plot for investors, who will want to hear reassuring words and concrete strategy from Stumpf’s immediate replacement, COO Timothy Sloan.
To manage expectations, Stumpf and Sloan held an hourlong call with about 500 senior executives Monday, The Wall
Street Journal reported. Sloan, who was named CEO and elected
to the board Wednesday, will now field questions from Wall Street largely on his own.
During the internal conference call, Wells Fargo executives were assured that efforts by some states to suspend some business with the bank “weren’t having much effect,” the WSJ reported. The bank is still reporting growth in new checking accounts even as the growth rate slowed, Sloan is reported to have said. “To say the last month has been difficult is an understatement,” Sloan said. “It’s going to be harder for a while, and we get that.”
In a recent KBW podcast, Kleinhanzl said he estimates the bank could lose about $ 400 million in both 2017 and 2018 “due to friction” stemming from the scandal.
Wells Fargo’s earnings per share for the third quarter are estimated to have fallen 4% to $ 1.01, according to S& P Global Market Intelligence.
Low interest rates have helped fuel the mortgage market, one of the brighter spots for the bank sector. But bank revenues also have been pressured by the narrow spread in the interest rates charged on loans and paid on deposits. The banks still managed to eke out a 1.4% year- over- year earnings growth in the second quarter, according to the Federal Deposit Insurance Corp.
Consumer loans and other businesses compensated for the narrow interest rates spread. But sluggish demand for commercial and industrial loans remains a concern for analysts as banks want to make up for the interest income squeeze with greater loan volume. Commercial and industrial loans were flat in the third quarter compared to the previous quarter, according to data from the Federal Reserve last week.
A slow commercial loan growth rate in Q3 is due largely to “seasonal softness” in auto dealership business, tepid manufacturing activity in summer months, weak corporate acquisition activity and the energy industry’s ongoing troubles, Brian Klock, an analyst at Keefe, Bruyette & Woods, said in a podcast. Brexit concerns could also be keeping some companies from borrowing as they keep their plans on hold while Britain considers details of its exit from the European Union.
Global investors are also spooked by Deutsche Bank’s woes, with some comparing it to the early dramas of Lehman Brothers, which crumbled in 2008 and set off the financial crisis. The German behemoth saw its investment banking business plummet this year and its market value cut about half.
“To say the last month has been difficult is an understatement. It’s going to be harder for a while, and we get that.” Wells Fargo’s Timothy Sloan