Wells board shake-up fails to kill off scandal
In the five weeks since the scandal over bogus accounts erupted at Wells Fargo, John Stumpf adopted various tactics to defuse the row.
He scrapped the sales targets blamed for encouraging under-pressure workers to resort to fraud, forfeited $40m in pay and took out full-page adverts in US newspapers apologising for the bank’s behaviour — all without success.
Now the bank has taken a more drastic step, caving in to political and public pressure by offering up the head of Mr Stumpf — abruptly ending his 34-year career at the bank and nine-year spell as chief executive.
The big question is whether his departure is enough to draw a line under the scandal once and for all. His replacement as chief executive, Tim Sloan, joined Wells 29 years ago and has been its president and chief operating officer for almost a year.
Politicians who have put the bank in the line of fire warned the changes were not enough to appease them. “Unfortunately, Mr Stumpf’s retirement does nothing to answer the many questions that remain,” says Sherrod Brown, the top Democratic member on the Senate banking committee.
Khalid Taha, a former Wells Fargo employee who is now a member of the Committee for Better Banks, says: “He needed to go and hold himself accountable. However, the person who replaced him was his right-hand man. Sloan was one of the people who created the bad environment.”
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“I’m sure he will make changes but I doubt these will benefit the workers or the customers,” Mr Taha says.
While several analysts and investors on Wall Street welcomed the change of leadership, the share price reaction was lukewarm, reflecting the scale of the challenges ahead for the incoming chief.
Wells’s shares followed the market down on Thursday, losing 2 per cent to $44.46 by lunchtime in New York to leave them just shy of their lowest point since early 2014.
“The issues don’t go away because Tim Sloan is a different person now leading the company,” as Marty Mosby, analyst at Vining Sparks, put it.
After deciding his presence was undermining the bank’s efforts to move on, Mr Stumpf told a special meeting of the board on Wednesday that he wanted to retire, a person familiar with his departure said.
Directors did not resist. They moved quickly to replace him with Mr Sloan as chief executive and Stephen Sanger, another longstanding insider who has sat on the board for 13 years, as chairman.
It is a dramatic downfall for the man who had steered Wells Fargo through the financial crisis and helped it become the most valuable bank in the world — but who became a public hate figure as the scandal engulfed it.
Mr Sloan himself would not be drawn on whether he thought the change at the top would be enough to mollify critics. “I don’t know the answer to that question”, he says. The new chief has received early support from investors, however.
Backers highlight his background in the commercial and wholesale side of the business, whereas the fraudulent sales practices took place at Wells’ community banking division.
“It’s the beginning of the healing process,” says Bill Smead, founder of Smead Capital Management, which holds Wells stock. “But the political grandstanding won’t stop — they can get more favourable attention for themselves by picking on these people for months.”
Mr Sloan effectively has two jobs to do — restoring trust in the bank and recovering from the scandal, while also being responsible for running what remains one of the world’s largest institutions with $1.9tn in assets.
The incoming chief says that in the short term he will “execute on the plans we already have in place”. That includes completing an internal review of sales practices going back to 2009 and compensating customers who were subjected to fraud. He is also striking a contrite tone to mend relationships that have come under strain.
State treasurers in California and Illinois have paused doing business with the bank — although a more important question is whether it will also lose regular retail customers in significant numbers.
The position of the bank’s mobile app has slipped in the download rankings, highlights Brennan Hawken, analyst at UBS. The gap between Wells and its rivals Chase and Bank of America is now at the widest level since 2014, although Mr Hawken acknowledges “this is an early and imperfect measure of customer behaviour”.
Investors will get a further insight into the fallout on Friday when Mr Sloan presents his first set of financial results. Analysts are expecting Wells to disclose a 5 per cent year-on-year decline in third quarter net income to $5.2bn on flat revenues.
He signals he does not envisage a radical change to the bank’s strategy, dismissing the suggestion Wells might aggressively expand its fledgling investment bank to compensate for the recent difficulties at its sprawling retail operation.
Mr Sloan says he is “not going to favour any area of our business — there are great opportunities across the entire platform” — although he is planning a deeper push into digital.
“There is a lot of change in the financial services industry,” he adds. “We know we need to move a little bit faster.”
While Wells has scrapped sales targets, the bank is unlikely to abandon efforts to cross-sell a wide range of products to customers — a strategy that helped the bank become the most valuable in the world before the scandal hit its share price.
Mr Smead is confident Wells will recover, drawing a parallel with the “London Whale” scandal at JPMorgan. “Three years later no one remembers that, at least as far as the stock price is concerned,” he says.
That the market remains concerned about Wells’ prospects should be welcomed by prospective shareholders, adds Mr Smead, who cites advice from the famed investor John Templeton. “If you can see the light at the end of the tunnel [as an investor], you’re too late.”
Tim Sloan © AP