A few days ago, Wells Fargo (WFC) announced it was cutting about 1,100 jobs.
This may be the beginning of a trend for the company, with many more jobs being cut in the future.
Since the 2008 financial crisis and the consolidation of the money centers into the giant four that remain in the U.S. -- Wells Fargo, Bank of America (BAC), JPMorgan Chase (JPM) and Citigroup (C) -- Wells has done the best job by far of controlling expenses and maintaining employment.
A lot of this has to do with the efficiencies the company has been able to achieve because of its concentration in the residential mortgage space.
As a result, it has the lowest non-interest expense of all four, of which employee salary and benefits is a part, while simultaneously maintaining the largest workforce.
Wells has about 227,000 full-time employees, vs. 201,000 at JPMorgan, 164,000 at Bank of America and about 179,000 at Citigroup.
As a result, Wells is the only one of the four with a non-interest expense (NIE) for salary benefits being greater than 50%, at about 56% of total NIE.
At JPMorgan, Bank of America and Citigroup that percentage is 38%, 38% and 33%, respectively.
Wells has been able to afford to maintain its labor force size by cutting expenses elsewhere and growing its share of the residential mortgage servicing business, which has allowed it to have an overall lower NIE than the other three.
I applaud the management of Wells Fargo for taking this approach to its business. The other three have opted for the more expedient and easier way of cutting expenses by reductions in jobs and diverting a portion of the labor savings to increases in advertising.
The total cost of advertising for Wells in 2014 was about $600 million. By comparison, for JPMorgan, Bank of America and Citigroup it was $2.8 billion, $1.5 billion and $1.6 billion, respectively.
In the last three years, JPMorgan, Bank of America and Citigroup have cut their workforces by 6%, 19% and 10%, respectively, whereas Wells' full-time employee count is about unchanged.
As a result, it now spends more on salaries and benefits as a percentage of earning assets than the other three, at about 1.6% vs. about 1.3% at JPMorgan, 1.5% at Bank of America and 1.2% at Citigroup.
Wells has been able to maintain this strategy as a result of its growth in the residential mortgage business. Much of this accrued to Wells as a result of the legacy issues in the business that Bank of America has had to deal with over the past several years that caused it to lose its traditionally dominant role in the space.
At this point, though, the logical conclusion, in my opinion, is that Wells has created as much efficiency as possible in the non-labor expense area, allowing it to maintain high labor expenses, but the company will have to begin the process of reducing its labor expenses by reducing jobs in the near future.
If this were to occur, it would almost certainly be viewed very positively by equity market participants, though, and provide a counter to any slowdown in housing or some other external factor that caused the mortgage business to slow at Wells Fargo.
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