Breakingviews: New Wells boss taking on even bigger fixer-upper

Charlie Scharf has more work to do at Wells Fargo than previously thought. The former Bank of New York Mellon boss, and acolyte of JPMorgan’s leader Jamie Dimon, starts his new job atop the $220 billion San Francisco-based lender next Monday. Fixing its culture and appeasing its regulators were already high on his to-do list. Third-quarter earnings released on Tuesday show Wells Fargo’s core business is also a shadow of its former self.

One of interim boss Allen Parker’s last acts in charge was to oversee setting aside $1.6 billion to cover potential litigation costs arising from Wells Fargo staff opening more than 2 million fake credit-card and retail-banking accounts to hit sales targets. That scandal cost then-boss John Stumpf his job three years ago; and its fallout prompted his successor Tim Sloan to step down in March.

The charge ostensibly lopped more than a quarter off earnings in the three months to the end of September and dragged annualized return on equity down to a dismal 9%. Add it back in, and that metric jumps back up to a respectable 13%.

Trouble is, that’s not the only noise in Wells’s third quarter. It booked a $1.1 billion gain from selling a retirement planning and record-keeping business, and another $300 million or so each from gains on equity investments and from off-loading some crisis-era pick-a-pay mortgage loans. Factor in those and the cost of buying back some preferred stock and return on equity dips back into single digits. A slight increase in noninterest expenses in addition to the legal reserves didn’t help.

Some matters were out of Wells Fargo’s control. Federal Reserve rate cuts and market moves during the quarter lopped almost $1 billion off lending revenue from the same period last year. That trend whacked Citigroup and JPMorgan, too. But these two held up better, albeit with lower taxes giving Citi a boost. Scharf is finding out that Wells is a bit more of a fixer-upper than he expected.

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