NEW YORK (Reuters) – Wells Fargo & Co’s corporate bank has a revenue problem.

FILE PHOTO: A Wells Fargo ATM machine is shown in Los Angeles, California, U.S. October 19, 2018. REUTERS/Mike Blake/File Photo

As its consumer bank begins to see signs of recovery from a sales practices scandal that erupted more than two years ago, the San Francisco-based lender has struggled to expand its customer base in the unit catering to businesses and institutional clients. Revenue in the corporate bank dropped 4 percent last year.

Before the scandal, it was rising 6 percent a year on average. Because it offers better margins, the health of the corporate bank is critical to Wells Fargo; it represents about a third of revenue but roughly half of $22 billion in annual profit.

The bank first told investors in September that while it retained most customers throughout its scandals, it was having a harder time recruiting new clients.

This trend has been even more dramatic with the corporate bank where customers tend to stay put. “It’s been a little bit more challenging for us to bring in new customers,” corporate bank head Perry Pelos told Reuters in a recent interview.

Corporate clients are harder to win in part because commercial banking relations are more complex. Business customers seek cash management services, assistance with importing and exporting transactions, and various forms of credit such as asset-backed loans or revolving lines of credit. These services are usually locked in with multi-year contracts; some clients can only switch providers every five years.

Wells Fargo executives say they are playing the long game, having their teams reach out to prospective clients to build relationships that they hope will pay off down the road.

“I’ve lived through an entire generation of ownership before we won the business,” said Greg O’Brien, the division manager for commercial banking in New England.


Last year, executives and analysts identified signs of life in Wells Fargo’s consumer unit for the first time since the 2016 scandal that rocked the bank. Primary checking accounts grew 1.2 percent in 2018, and auto loan originations jumped 9 percent in the most recent quarter.

The corporate bank, however, continues to languish. When business clients consider switching banks, Wells Fargo’s lingering reputational problems make it a harder sell, analysts say. Consumers don’t have to justify their decision to open a new credit card to anyone but themselves, said Autonomos analyst Brian Foran. Decision-makers at companies, such as the treasurer, have to answer to the board and other executives.

“At the margin some of them are going to say, Wells Fargo is very good but so is JPMorgan,” he said. “Right now, no one gets fired for hiring JPMorgan.”

Wells Fargo officials acknowledge the scandals remain a concern with certain customers. “I’ve certainly been in meetings where it comes up,” said O’Brien.

The scandal began with the disclosure the lender had opened unauthorized accounts for consumers. Later Wells Fargo disclosed that corporate bank employees had improperly altered customer information on certain documents. Wells Fargo has racked up billions in fines. Last year the Federal Reserve imposed a punitive asset cap on the bank, preventing it from growing its balance sheet until it improves risk management.

Pelos, the corporate bank chief, has tried to compensate for the declining revenue by slashing costs. But the 3 percent reductions last year weren’t enough to offset the revenue slide. Though 2018 profit increased, the unit became less efficient. A key metric that measures the cost of one dollar of revenue, increased to 56 percent from 55 percent a year earlier.

Wells Fargo has not provided 2019 revenue projections for its corporate bank. “There’s a lot of confidence that they are going to hit their expense targets, but there’s much less confidence that revenue is going to be able to grow as they do that,” Foran, the Automos analyst, said.

Revenue declines are bad for any company, but for Wells Fargo it raises questions about whether the kind of growth it reported before its scandals is achievable with tighter oversight, analysts said. In the past, the corporate bank focused on growing its cross-selling metric, which measured how many products employees hawked to clients, according to filings.

The bank still tracks referrals across different parts of the business today, but the company no longer reports them publicly.

O’Brien, the northeast middle bank head, said the cross-selling system, which led to the creation of the fake accounts in the consumer bank, didn’t cause similar problems in the corporate bank.

“We have never been in the business of creating false needs to sell,” he said.

Corporate bank revenue has also been hurt by the Fed asset cap. The unit no longer carries deposits for central banks, and it has sold off some smaller businesses. In January, Wells Fargo pushed back the timeline for when it expects to get the asset cap lifted by six months.

Executives told Reuters they are being “pleasantly persistent” with prospective corporate clients by pitching them ideas and connecting them with existing clients. So far their efforts have failed to bear much fruit, but executives say they have seen signs that customer acquisition trends are beginning to shift.

A Wells Fargo logo is seen at the SIBOS banking and financial conference in Toronto, Ontario, Canada October 19, 2017. REUTERS/Chris Helgren

As evidence that business was looking up, Wells Fargo pointed to recent transactions it helped advise like Berry Global’s $4.39 billion takeover bid for RPC Group Plc, .

Earlier this month, Wells Fargo also advised its first ever USD global benchmark for the World Bank.

“My expectation is that it’s going to be better,” Pelos said. “Is it going to be back to where it was before? It’s hard to call.”

Reporting by Imani Moise; Editing by Neal Templin and Paul Thomasch


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