WELLS FARGO FACES EROSION OF CUSTOMERS; POOR SERVICE CITED IN SWITCHES.

Byline: Bloomberg News

When Wells Fargo & Co. President William Zuendt, 50, retires later this year, he'll join an exodus of bank customers who have departed since he oversaw last year's merger with First Interstate Bancorp.

Two weeks ago, the State of Nevada yanked its $1.3 billion worker's compensation account from Wells Fargo.

``The biggest issue was service,'' said State Treasurer Bob Seale. ``They're a legend in our state - long lines and poor service.''

When Wells Fargo acquired First Interstate a year ago, it promised to slash $800 million in annual operating costs. It's well on its way to fulfilling that promise. More than 11,000 jobs have been eliminated, and the bank expects to cut an additional 2,500 by the end of the year. Under Zuendt's leadership, hundreds of branches were shut, replaced by supermarket kiosks and on-line banking. And customers fled.

Core deposits fell more than $5 billion from Dec. 31 to March 31, to $76.2 billion.

``Due to runoff in our loan and deposit portfolios we are not where we would like to be with respect to revenue,'' said Chairman Paul Hazen last month. Company executives weren't available for comment last week.

Bank customers have some famous company. The bank's shares slumped 5 percent on Monday after Berkshire Hathaway Inc., the holding company controlled by Warren Buffett, said it cut its stake in Wells Fargo to 7.82 percent from 8.15 percent. Buffett, one of the nation's best-known investors and its second-richest man, is famous for his strategy of buying and holding stocks.

Last Wednesday the stock fell 7-1/4 to 258-3/8.

``Buck 'em!''

Investors, impressed with the potential for increased operating efficiencies, at first bid up the price of Wells Fargo shares after its $13.2 billion First Interstate acquisition. More recently, Wall Street has become concerned that customers are being driven away by the resulting reduction in services.

``You usually expect some dislocation in a takeover this large, but this exceeded expectations because of some service problems,'' said analyst Joel Silverstein of Deutsche Morgan Grenfell.

Competitor Glendale Federal Bank has successfully targeted unhappy Wells Fargo customers in a $20 million advertising campaign by BBDO West that began before even the First Interstate merger was completed. Its current slogan plays off Well's trademark stagecoach and Wild West theme: ``Trampled in a Fee Stampede? Buck 'Em!''

Bob Trujillo, executive vice president, said the majority of the 12,000 new accounts it opened last month were switched from Wells Fargo.

``They're much more intent on becoming a transactional bank than a relationship bank,'' said Trujillo. Glenfed has also hired away 30 former First Interstate managers and acquired a dozen branch offices from Wells.

Overpriced?

Since reaching an all-time high of 319-1/4 on March 10, shares of the San Francisco bank have fallen about 20 percent to a recent price of 255.

``They were overpriced,'' said analyst Michael Abrahams of Sutro & Co. ``It was the cult stock, trading at 17 times, 18 times earnings. Warren Buffett was in it.''

By contrast, other large retail banks trade at about 13 times earnings, according to Salomon Brothers research.

Wells Fargo's stock has lagged even the struggling financial sector, suffering more than twice the loss of the Keefe, Bruyette & Woods index of the 50 largest U.S. banks over the same period. The index fell 8 percent, while the overall market, measured by the Standard & Poor's 500 index, gained 1.6 percent.

Most bank stocks have fallen on hard times since March, when the Federal Reserve fueled investor concern that lending would slow down amid interest rate increases. Yet Wells Fargo's decline has been longer-lived than for many of its bank peers. Analysts blame problems in integrating its acquisition of First Interstate in 1995.

Wall Street has been lowering expectations for Wells for more than a year. Brown Brothers, Harriman & Co. analyst Raphael Soifer, after visiting the company last Friday, reduced estimates for 1997 earnings to $14.15 from $16.00 and cut expected earnings next year to $18.25 from $20.75.

Customer erosion

``There's customer erosion on the small-business side, mostly among former First Interstate customers outside of California,'' Soifer said.

``They had major problem with customer service outside California, where First Interstate had a better reputation for service,'' Abrahams said. ``Wells is better known for streamlining, cost cutting. And the customers walked.''

Arizona State Treasurer Tony West said he knows that firsthand.

``People are voting with their feet and leaving their system in droves,'' he said. ``They're having a major hemorrhage in Arizona. The reason is no service.''

Oregon's chief bank regulator Cecil Monroe said service complaints from Wells customers continue to pour into his office.

``I wish it was getting better,'' he said. ``It's a mess.''

Some analysts say Wells' hard-fought hostile takeover may have backfired, since the bank hasn't been able to generate projected savings, while an exodus of depositors and borrowers means Wells needs to increase earnings from a smaller-than-expected base.

Wells Fargo stock still suffers from bad publicity surrounding integration glitches, as customers complained about long waits to speak to telephone banking staff or problems accessing information about customer accounts.

Turnaround coming

``Wells was trying to integrate First Interstate while also converting the whole branch network to a new model with greater reliance on supermarket banking,'' Soifer said.

Business customers especially found that the in-store branches didn't suit their needs, he said.

``When your branch is being closed, you don't like it,'' Soifer said.

As a result, revenues are down.

``That's likely to continue in the second quarter,'' Soifer said. ``We don't know when that will start to turn around, though I think eventually it will.''

In its 1996 annual report, Wells predicted the revenue decline would halt in the second quarter.

After first quarter earnings were reported, analysts projected that revenue would be flat during the second quarter and start to increase during the third quarter.

``Based on my visit, it's not clear that this will be the case,'' Soifer said. ``The second quarter may be down, and it's not at all clear revenue will increase in the third.''

Supermarket strategy

The real test for Wells will be how customers respond to an expanded network of supermarket branches.

Even so, analysts say they support Wells' strategy. ``Wells is a fine company. Their strategy is right,'' Soifer said.

``They all worked on First Interstate. They all get their share of the credit and the blame.''

Analyst Silverstein at Deutsche Morgan Grenfell thinks Wells' problems are pretty much behind it.

``This is a major franchise in one of the most attractive regions of the country. I don't think the strength of the franchise is threatened in the long term,'' Silverstein said.

To be sure, Zuendt's plan remains unproven.

``If the supermarket strategy in two to three years appears to be a dud, then we'll have to blame Bill (Zuendt),'' Soifer said. ``I don't think that's going to happen.''