Gillian Tan is a Bloomberg Gadfly columnist covering deals and private equity. She previously was a reporter for the Wall Street Journal. She is a qualified chartered accountant.

Wells Fargo & Co. is having a hard time pleasing anyone.

At its annual investor day on Thursday, the second-largest U.S. lender by market value lifted the targeted annual savings figure from its cost-cutting program to $4 billion from $2 billion by the end of 2019. The move, which was flagged by analysts after hints from the bank itself, comes after Wells Fargo's Chief Executive Officer Tim Sloan said at the Milken Institute conference last week that the bank would prioritize employees over shareholders:

"When you put your shareholders first – I hope Warren Buffett isn't listening by the way – but when you put them first, then you're going to make mistakes. Because you're going to make short-term decisions that aren't focused on creating a long-term, successful company."

The San Francisco-based bank is now in a delicate situation: Despite implementing a higher minimum wage and focusing on recruitment and retention, staff morale will most certainly be dented. That's because the up-sized cost cuts are set to cause job losses as technology increasingly replaces manual tasks, exampled by plans for further branch closures.

Where Are the Savings Coming From?
The bulk of Wells Fargo's $2 billion of savings in 2018 will come from slashing spending in categories including marketing, finance, HR, operations and call centers
Source: Company presentation

Meanwhile, the decision to slash additional expenses -- a move surely designed to appease shareholders -- wasn't even well-received. That's in part because the magnitude of the extra cuts could have been greater, and as it stands, they won't filter through soon enough to prevent Wells Fargo from missing a previously announced target for its so-called efficiency ratio. 

While its rivals successfully reduced non-interest expenses between 2014 and 2016, Wells Fargo actually saw this figure climb
Source: Bloomberg

Instead -- and to the chagrin of investors -- for every $1 of revenue earned in 2017, Wells Fargo expects to incur expenses of 60 cents to 61 cents, more than its previously targeted range of 55 cents to 59 cents. The higher cost figure reflects settlements related to its inappropriate retail sales practices as well as higher funding costs and lower loan growth in the current environment of rising interest rates. And what it means is that, for the time being, Wells Fargo has to accept that it's less efficient than rivals JPMorgan Chase & Co. and Citigroup Inc., banks over which it has long held an advantage. 

Reclaiming Lost Ground
Wells Fargo's enhanced cost cuts are partly designed to help it improve its efficiency ratio, which was once among the lowest of the largest U.S. lenders
Source: Bloomberg Intelligence
A lower number indicates increased efficiency

Employee-related spending is also among drivers of the lender's deteriorating efficiency. Since 2014, Wells Fargo has added $1.7 billion in expenses related to compensation and benefits, with a chunk of this attached to higher salaries for full-time employees. That staff has been growing in part due to a concerted effort to bulk up its risk and technology arms, as well as its acquisition of some financial businesses from General Electric Co. 

Shareholders have the right to be displeased. Even though the bank says it will meet profitability goals, executives said this is likely to be at the lower end of target ranges which implies return on equity toward 11 percent and return on assets of around 1.1 percent. While that's still above the industry average of 8.8 percent and 0.9 percent, respectively, according to data from Bloomberg Intelligence, it's barely a premium to JPMorgan. Today, the Jamie Dimon-led lender trades at a slim discount to Wells Fargo as a measure of price to tangible book value or forward price to earnings, but could reasonably close the gap depending on the performance of both banks in coming quarters. 

Recovering, Slowly
Wells Fargo & Co. slipped in the eyes of everyday American consumers following its sales practices scandal, but sentiment is gradually improving
Source: YouGov BrandIndex
Methodology: "Buzz" is also the net sentiment generated across all media (advertising, news, word of mouth). Data is from 4,800 adults surveyed each weekday from a representative US population sample.

Wells Fargo's new advertising campaign says it's "building better every day" as it recovers from its retail sales scandal that has shaken investor confidence in its board of directors and the bank as a whole. The tagline is addressed to customers, but Wells Fargo must prove that the slogan is more than just words for shareholders and employees as well. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Gillian Tan in New York at

To contact the editor responsible for this story:
Beth Williams at