Wells Fargo CEO on 2Q Earnings: ‘We Are Extremely Disappointed’

By Alex Padalka July 14, 2020

Wells Fargo says its wealth and investment management business client assets rose in the second quarter of 2020 but were still down year-over-year — just as the unit’s net income plunged 70% year-over-year.

The bank had $1.8 trillion in total client assets at the end of the second quarter in the unit, which includes Wells Fargo Advisors, the Private Bank, Abbot Downing and Wells Fargo Asset Management, according to the firm’s latest quarterly earnings report. That’s down 4% from the year prior, Wells Fargo says, but up 12% from the $1.6 trillion Wells Fargo reported in the first quarter of 2020. The firm attributes the lower year-over-year numbers to net outflows in its correspondent clearing business.

Wells Fargo also says that it saw a 43% year-over-year drop in referrals resulting from the partnership between the wealth and investment management unit and community bank business, which it says was a result of “lower referral activity due to Covid-19.”

Commenting generally about the bank’s earnings, Wells Fargo CEO Charles Scharf says in a statement: “We are extremely disappointed in both our second quarter results and our intent to reduce our dividend. Our view of the length and severity of the economic downturn has deteriorated considerably from the assumptions used last quarter, which drove the $8.4 billion addition to our credit loss reserve in the second quarter.”

“Our view of the length and severity of the economic downturn has deteriorated considerably from the assumptions used last quarter.”
Charles Scharf
Wells Fargo
He adds: “While the negative impact of the pandemic is unprecedented and many of our business drivers were negatively impacted, our franchise should perform better, and we will make changes to improve our performance regardless of the operating environment.”

Scharf has signaled what lies ahead for the bank.

“We believe it is prudent to be extremely cautious until we see a clear path to broad economic  improvement. We are confident that this eventual economic improvement combined with our actions to increase our margins will support a higher dividend in the future,” he says.

Client assets in the retail brokerage business were $1.65 trillion in the second quarter of 2020, up 12% over the prior quarter but down 4% from the second quarter of 2020, according to the report. Wealth management client assets were $224 billion in the second quarter of 2020, up 5% from the prior quarter but down 3% from the same quarter last year, Wells Fargo says. 

Average loan balances in the second quarter of 2020 were up 5% year-over-year, while average deposits shot up 20% over the prior year, which the bank attributes primarily to growth in its brokerage clients’ cash balances.

The bank ended the second quarter of 2020 with 13,298 financial advisors, down from 13,450 in the previous quarter, according to the first- and second-quarter earnings reports. Advisor count is also down 4% year over year, Wells Fargo says. 

Wells Fargo already lost several advisors this month as well, including a pair of financial analysts who launched  their own independent wealth management practice, an advisor who left for Raymond James Financial Services, the firm’s independent advisor channel, a team that jumped ship to Ameriprise, an industry veteran who bolted for RBC Wealth Management and a team that departed Wells Fargo Advisors Financial Network for LPL Financial. 

Meanwhile, net income in Wells Fargo’s wealth and investment management unit fell to $180 million in the second quarter of 2020, which was 61% lower than in the prior quarter and 70% lower than in the second quarter of 2019, according to the report. 

Wells Fargo says net income was hurt by a $255 million rise in the allowance for credit losses during the quarter. The business also saw a 2% increase in non-interest expense in the second quarter, which reached $3.2 billion, according to the report. Wells Fargo attributes the rise to a $401 million increase in deferred compensation expense, mostly offset by higher net gains from equities. 

The unit also had higher regulatory, risk and technology expenses in the second quarter, but they were in part offset by lower broker commissions, lower expenses on other personnel, which had been seasonally higher in the first quarter, as well as lower equipment expense, the banks says. As did most of its rivals in the financial services industry, Wells Fargo shut down branches and moved to work-from-home arrangements in the wake of the Covid-19 pandemic.  

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