Does Wells Fargo Have a Plan?
Wells Fargo & Co. Chief Executive Officer Tim Sloan has said it to customers, shareholders, and employees. The bank ran television commercials to make sure nobody missed it. In October he flew to Washington to say it to Congress: He’s sorry for how the bank abused consumers.
A year and a half after the bogus-accounts scandal that brought down Sloan’s predecessor, John Stumpf, it’s clear the 31-year company veteran wants the bank—and everyone else—to move on. Consider Wells Fargo’s vision and values booklet, a kind of corporate mission statement for employees. About a year ago, the bank added “rebuilding trust” to a list of priorities. In the newest version of the handout, those words are gone.
Sloan says this was part of an effort to make the document more concise, and, in any case, Wells Fargo has done a lot to clean itself up. In an interview on Feb. 12, he defends the company’s culture. He says the media isn’t writing about Wells Fargo’s accomplishments, and he addresses some of its critics. “We made some serious mistakes at this company,” Sloan says in a conference room at the bank’s headquarters in San Francisco. “We’ve taken responsibility for those mistakes. You name it, we’ve changed it.” (A spokesman says “Rebuilding Trust” will be the name of its next annual report.)
Sloan insists there’s not much left to fix—it’s a matter of executing well from here. “I don’t think we have a culture problem,” he says. “When you look at the mistakes we made, we had an incentive plan in our retail banking business that drove inappropriate behavior. That’s been changed.”
Even if those problems are in the past, the Federal Reserve has ensured that their legacy will remain the No. 1 problem on Sloan’s desk. On Feb. 2 the banking regulator said Wells Fargo wouldn’t be allowed to increase assets past $1.95 trillion until the bank improves internal oversight. Fed officials said the lender’s pattern of lapses demanded an unprecedented sanction. First there were the unauthorized accounts. Employees pressured to meet aggressive sales goals set by Wells Fargo executives may have opened millions of them in customers’ names without permission; thousands of workers were fired. After that revelation, the bank disclosed it had overcharged some auto-loan and mortgage customers.
Now every increase in assets—loan balances or otherwise—must be offset with cuts elsewhere. Sloan and Wells Fargo’s chief financial officer, John Shrewsberry, say the bank is considering reducing internal trading assets; it may also cut deposits from some commercial and financial institution clients. As a result the bank’s net income this year could fall as much as $400 million. “It’s impossible to know” if the knock to profits could be worse, says Steve Eisman, a money manager at Neuberger Berman Group famous for his precrisis wager against subprime mortgages. “There’s never been a case where the government said, ‘You can’t grow’ ” to a bank in good financial condition. Eisman is shorting Wells Fargo stock—that is, betting that it will fall.
The third-largest U.S. bank by assets could be vulnerable in its corporate banking business, as rivals try to steal lucrative clients, says Charlie Peabody, an analyst at Compass Point Research & Trading. “That’s what the JPMorgans and Bank of Americas are going to go after,” he says.
Some see Sloan scrambling to make things better. He spent part of Valentine’s Day with Fed regulators in Washington. “He’s working like crazy to try and clean things up,” said Warren Buffett, whose Berkshire Hathaway Inc. is the bank’s biggest shareholder, in a recent CNBC interview. “But he’s had a lot to clean up.” A growing U.S. economy and rising interest rates are generally good news for banks, but Wells Fargo has been lagging peers. Its net income fell 5 percent in the year ended in September, while income rose 14 percent across the rest of the U.S. banking industry. It lost market share in deposits in most states.
Sloan is seeking to improve earnings even under the Fed cap. To do that, he’ll have to choose his spots carefully, focusing on the businesses where Wells Fargo can squeeze the most profits. He thinks he can most easily improve on the consumer side—precisely where the bank’s reputation has suffered. (Unlike, say, derivatives losses, bogus accounts are a scandal every potential customer can understand.) According to Y&R’s BAV Group, Wells Fargo plummeted from the top 20 percent of brands in terms of consumer trust to the bottom half.
Tough critics such as Senator Elizabeth Warren (D-Mass.) say Sloan has been at the bank too long to inject a new perspective. Economist Larry Summers has said the directors departing the board that oversees Sloan should be leaving “with an element of humiliation.” But Sloan is sometimes willing to punch back. He says Summers, a former secretary of the Treasury, probably doesn’t know anything about the bank. “But he has an opinion, that’s great,” Sloan says. About California gubernatorial candidate and Treasurer John Chiang, who’s bashed Wells Fargo before, Sloan says: “I look forward to seeing our state treasurer and reminding him that when he was the controller of the state and the state had its financial problems, the bank that stepped up for this state was Wells Fargo.” The lender was among dozens that honored IOUs from California in 2009 when it couldn’t pay its bills.
Sloan says even when the bank discloses problems in the aftermath of the unauthorized-accounts revelations, it “creates an issue, then gets reported. And then all of our foibles over the last year and a half get reported in every story.” He wants the focus to be on what’s going right, such as the bank’s philanthropy.
“We don’t feel like we have to do anything new other than to make sure that our customers understand that we’re out there,” Sloan says. He says Wells Fargo, the U.S. lender with the most branches, can generate higher earnings from households. He talks about better mobile apps and cardless ATMs that work with phones. Steve Ellis, the bank’s head of innovation, says consumers particularly value easy-to-use conveniences.
Bank executives say the company will more aggressively pitch credit cards to consumers who don’t already bank with Wells Fargo. The bank is ramping up mortgage lending to black Americans and the fast-growing Hispanic population. John Taylor, CEO of the National Community Reinvestment Coalition and an outside adviser to Wells Fargo, says no major bank better serves minorities.
Wall Street analysts who follow the company are skeptical. A majority recommend that investors not buy Wells Fargo shares. RBC Capital Markets’ Gerard Cassidy says investors would be better off buying stock in banks more able to capitalize on the growing economy. For all its problems, however, Wells Fargo retains deep strengths. It reported more than $22 billion in net income last year. It’s one of only six publicly traded U.S. companies to have generated more than $10 billion in annual profit since 2010, data compiled by Bloomberg show, putting it in the same league as Apple Inc.
Wells Fargo built that long-term record on its legendary ability to sell. Calling its branches stores, executives focused on cross-selling—getting customers to sign on to multiple products, from checking to mortgages to credit cards. Former CEO Stumpf had a goal of eight accounts per household because, as he wrote in a 2010 annual report, “it rhymed with ‘great.’ ” As a senior executive, Sloan, too, touted the bank’s ability to sell more to every customer. “The more that we cross-sell, the more revenue grows,” he said in May 2014. Wall Street loved it, and for a few years after the financial crisis, Wells Fargo was the world’s most valuable bank. (Now it’s No. 4.)
The 2016 disclosures about sham accounts revealed the cost of that sales culture. Federal investigators alleged executives knew about the problem for a decade. “The sad irony of this is, with a once-good reputation, vast branch network, and low-cost deposit funding, they could have made quite healthy earnings without pushing the envelope,” says former Federal Deposit Insurance Corp. Chair Sheila Bair.
To stop branch workers from cheating to meet sales targets, Sloan ditched the goals and changed how bonuses are paid to employees, emphasizing teamwork, customer satisfaction, and growth in total deposits, loans, and investments. Wells Fargo also dumped a layer of midlevel retail bank executives and by yearend will have replaced most of its board. Bank executives say an internal reorganization has put Wells Fargo in a position to catch problems before they spread. “I’m a company person, loyal to the company, and whatever I can do to help them I’m willing to do it,” says Theresa LaPlaca, the executive in charge of handling complaints.
The bank doesn’t use the term “cross-selling” anymore, but it still wants customers to increase balances across products. The difference, says Jonathan Velline, a senior executive handling retail strategy, is that employees used to push a preset product, no matter the customer’s needs. Eisman, the money manager, says this shift endangers the bank’s ability to return to the growth path Wall Street so loved. “Now that the incentives are like everyone else’s, over time the profits will be like everyone else’s,” he says.
Before the consumer scandals, Stumpf got quizzed by Financial Crisis Inquiry Commission investigators. They asked how Wells Fargo avoided the troubles that befell other financial companies. Stumpf replied, “Culture eats strategy for breakfast every morning.” The challenge for Sloan is to prove that Wells Fargo has both of those right.