NEW YORK, July 14 (Reuters Breakingviews) – At a time when mergers and capital raising are going through the roof, who would be Wells Fargo (WFC.N)? The U.S. bank is one of the country’s biggest but barely dabbles in advising on deals, or the riskier kinds of business in which peers revel. Of its $20 billion of revenue in the second quarter, just 5% came from trading stocks and bonds, compared with roughly one-fifth at JPMorgan (JPM.N) and Bank of America (BAC.N). Still, the $178 billion Wells Fargo is the best performing big bank stock so far this year.
Relative to its Wall Street peers, the bank run by Charlie Scharf is as staid as can be. It’s essentially a commercial bank, with around $265 billion of residential mortgages. And in former times, it was one of the most efficient, until a series of customer abuses triggered various financial penalties, including a block on growing assets that won’t be removed until Scharf convinces the Federal Reserve his bank has changed its ways. Costs in the latest quarter ate up two-thirds of revenue, compared with 58% at JPMorgan.
Even that is a big improvement on the 80% figure that Scharf labored under a year ago. Expenses are going in the right direction: There was the $200 million or so yearly reduction in consultant fees and a roughly $900 million reduction in “operating losses,” a broad term that includes penalties for ripping off customers. Scharf’s other main accomplishment so far is not having to eat his words. He has targeted operating expenses of $53 billion for this year, and analysts on average think he’ll just about make it, according to Refinitiv estimates.
Meanwhile, the asset cap could be a blessing in disguise. Banks like JPMorgan are sitting on cash at the moment, ready to pounce when rates start to rise. For Scharf, waiting isn’t a choice. But once his handcuffs come off – which he conceded in April would still take “a lot of work” and a “significant amount of money” – it will be easier to forge ahead in areas like credit card lending, where Wells Fargo remains relatively small.
The catch is that by the time Wells Fargo is fixed, customers may have gone elsewhere. JPMorgan boss Jamie Dimon frets openly about the threat from digital rivals, from quasi-checking-accounts to buy-now-pay-later specialists. The difference is that Dimon has cash to spend on neutralizing the problem. While JPMorgan splurged $2.5 billion on technology in the first quarter alone, Wells Fargo spent $815 million. Dimon can count 57 million active digital customers to Scharf’s 33 million. Scharf is getting dressed up for a party for which he may be too late.
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– Wells Fargo on July 14 reported $6 billion of earnings for the second quarter of 2020, compared with a loss in the same period in the previous year, and analysts’ consensus forecast of $4 billion, according to Refinitiv. The U.S. bank reported a $1.6 billion benefit from reversing provisions against bad debt.
– The lender’s average loan balance fell 10% from a year earlier, roughly in line with the 11% decline at Bank of America. JPMorgan on July 13 reported that its average loans were flat. Deposits rose 17%, compared with an increase of 14% at Bank of America and 23% at JPMorgan.
– Chief Executive Charlie Scharf said that his bank still faced the “headwinds of low interest rates and tepid loan demand.” Wells Fargo is forbidden from growing its assets under a restriction placed on it by the Federal Reserve for past customer abuses.
Editing by Swaha Pattanaik and Amanda Gomez
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