Merger Woes Take Toll on Wells Fargo
In a sign that Wells Fargo & Co.’s indigestion from its takeover of First Interstate Bancorp is worse than expected, the bank’s stock fell 6.6% on Wednesday after it said its quarterly earnings once again won’t meet Wall Street’s estimates.
In a terse statement, Wells Fargo said its per-share earnings for the second quarter will be $1 less than the $3.53-a-share average that analysts expected--an unusually large discrepancy. Wells blamed issues “related to the First Interstate integration, including clearing accounts with other banks.”
The San Francisco-based banking giant, which would not comment further and did not have a conference call with its analysts, said it will release its second-quarter results Tuesday.
This is the fourth time in the last five quarters that Wells has disappointed analysts since its acquisition of First Interstate. But the latest disappointment--while not threatening the fundamental financial strength of the bank--appears to be more serious than the others.
The news--which follows a continuing exodus of customers, a partial sale of Wells stock by legendary investor Warren Buffett and a plague of computer glitches--is fueling growing concern about the takeover. Analysts, however, suggested that Wells won’t need to cut more employees or branches; they suggested that its problems stem in part from cutting too much, thus hurting customer service.
Wells shares plunged $18.38 on Wednesday to $260.63 on the New York Stock Exchange. The drop was the biggest since May 19, when the stock slid 5%, or $14.13 a share, on news that billionaire Buffett trimmed his Wells stake by 300,000 shares, to 7.82% of total shares from 8.15%. The stock is down 19% from its record of $320.50 in March.
“I’m very disturbed. So far, Wells has been a consistent quarterly disappointment,” said Sandra J. Flannigan, a banking analyst with Merrill Lynch & Co. “Bigger can be better, but you need to keep your customers. Customers matter.”
Known in the past for successful acquisitions, such as Crocker National Bank in 1986, Wells has had difficulty swallowing First Interstate, in part because of the size and different cultures at the two banks.
It hasn’t helped that Wells won First Interstate in a hostile takeover, said analysts, and that Wells has laid off more than 11,000 employees, most of them from First Interstate.
“They did a hostile acquisition and they did it in a hostile way,” said Michael Abrahams, an analyst at Sutro & Co. in San Francisco. “Now they’ve lost a lot of the people who kept customers happy.”
In fact, Wells’ core deposits dropped 7% to $76.2 billion between Dec. 31 and March 31. The bank has also lost some high-profile customers, mostly in other Western states, including Nevada, which pulled its $1.3-billion workers’ compensation account earlier this year.
Many smaller businesses and individuals have also fled, analysts said, lured by smaller regional banks such as Glendale Federal Bank.
Such banks have capitalized on the much-publicized computer problems at Wells. Its touted 24-hour automated telephone banking system was taken offline for several days in September, making it difficult for customers to get account information. In August, computer problems delayed the deposit of $40.3 million in direct-deposit payroll accounts.
Analysts said Wells shouldn’t lay off any more people than the 2,200 planned by year-end, and instead should work on retaining and luring back its customers.
“They need to provide customers with consistently good service from now on,” said Flannigan.
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A Drop at Wells
Wells Fargo expects second-quarter earnings to drop 30% over first-quarter net income because of costs related to its merger with First Interstate. Wells’ earnings, in millions, over the last 3 1/2 years:
2nd-quarter estimate: $237
Source: Bloomberg News
