Wells Fargo Closing 800 Branches by 2020: Litigation Expenses Lead to Cost-Cutting Measures

Wells Fargo Closing Branches
iStock.com/tupungato

Wells Fargo & Co (NYSE:WFC), the nation’s No. 2 bank, said it will be closing 800 more branches by 2020 (and increasing the number of available ATMs); the company did not say how many employees would be laid off in the process. On a conference call with Wall Street analysts, banking executives blamed the closures on the increased popularity of online and mobile banking. Analysts are not quite sure that’s the entire reason for the planned 800 branch closures.

Many believe Wells Fargo will close 800 branches by 2020 in large part due to mounting legal expenses brought on by banking scandals. Most recently, in September 2016, regulators fined the company for opening 3.5 million unauthorized customer accounts.

A similar scandal erupted last year when it was discovered that as many as 540,000 customers (since 2012) were charged for car insurance they didn’t want. On top of that, since 2012, some homeowners were incorrectly charged fees to lock in mortgage rates.

Litigation fees for the financial services company were $3.3 billion in the fourth quarter.

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In the third quarter, the lender took a $1.0-billion litigation hit. The mounting litigation costs drove the company’s 2017 expense ratio to its highest level in more than 20 years. Closing branches and cutting costs over the next two years are expected to bring the bank’s expense ratio back in line with its long-term target. In 2018, Wells Fargo plans to slash $2.0 billion in expenses and another $2.0 billion in 2019.

On Friday, January 15, Wells Fargo announced its financial results. Fourth-quarter net income increased 17% to $6.15 billion, or $1.16 per share, from $5.27 billion, or $0.96 per share, in the same prior-year period. Analysts were calling for earnings per share of $1.02. For fiscal 2017, net income was up one percent year-over-year at $22.18 billion, or $4.10 per share, from $2.19 billion, or $3.99 per share in 2016.

Despite plans to cut costs, reduce its number of branches from 5,900 this year to 5,000 in 2020, and lay off an unknown number of employees, Wells Fargo was generous to shareholders. In fiscal 2017, the bank returned $14.5 billion to shareholders through dividend payments and share repurchases.

Wells Fargo Previously Announces Closure of 450 Branches by 2018

Executives at Wells Fargo might blame the rise of the Internet for the branch closures but before scandals tainted Wells Fargo, the company was reluctant to reduce its footprint. Between 2012 and 2016, Wells Fargo closed around two percent of its branches.

By comparison, over the same time frame, Bank of America Corp (NYSE:BAC) closed 15% of its branches and JPMorgan Chase & Co. (NYSE:JPM) shuttered nine percent.

Fast forward to a couple scandal-plagued years, and it seems Wells Fargo has changed its tune when it comes to closing branches. But again, according to the bank, it has more to do with on-the-go banking customers than billions in litigation costs.

Since last year, Wells Fargo has announced it will close 15% of its branches, taking its network down to 5,000 from 5,900 by the end of 2020.

In May 2017, Wells Fargo announced plans to close 450 branches by the end of 2018—50 more than the bank announced earlier in the year. While it may all be a coincidence, in early 2018, after announcing significantly higher fourth-quarter litigation costs, the lender said it would shutter an additional 800 branches by the end of 2020.

Higher revenue and earnings is just one way for companies to boost their share prices. Another popular way is to increase cost-cutting measures. Should Wells Fargo struggle with revenue and earnings, it could very well implement additional financial engineering tactics, like branch closures and layoffs, to make its bottom line look better.

Investors and Wells Fargo employees could very well hear about additional bank closures in 2018 or 2019.

 

Sources:

Wells Fargo plans to close 800 more branches by 2020,” CNN, January 12, 2018.

Wells Fargo Reports Fourth Quarter 2017 Net Income of $6.2 Billion; Diluted EPS Of $1.16,” Wells Fargo & Co, January 12, 2018.

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Categories: Branch Closings, Job Cuts, News

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