Tim Sloan thinks that Wells Fargo is “the best bank in the world”. After more than two years as chief executive of the scandal-riven lender, he is quick to provide evidence — deposit growth, loan growth, returns — to show that while the bank has been wounded by controversy, it is now returning to its feet.
The view from the outside the group, however, is very different. In interviews with the Financial Times, dozens of investors, academics, competitors and employees and describe a damaged brand, a workforce held back by fear of repeating past mistakes, and the immense difficulty of drawing a line under one of the ugliest banking scandals in an era full of them.
A cut-throat sales culture in the retail division, where perverse incentives led employees to open millions of false accounts and mis-sell other products, was ignored or brushed aside by the board and senior management until the story went public in 2016. Wells’ first response when the problems emerged was mass firings of lower-level employees. More than 5,000 were forced out.
Only after this bad-apple theory failed to convince regulators, politicians or the public was there a board overhaul, the replacement of most senior leaders and an effort to rewire the bank’s culture.
Other instances of bad behaviour continue to come to light at Wells and the bank remains under tighter regulatory scrutiny than any other US lender in recent memory. Prominent politicians have said that Mr Sloan, who led Wells’ wholesale banking operation while the mis-selling was taking place, is not fit to lead the bank.
Mr Sloan takes all this in his stride, consistent with what a colleague calls his “unflappable, down to earth, Midwestern” style. “When any politician is running for office that they’re trying to win, and when they do that they will either mention us or not mention us to the extent that it’s beneficial to their election,” he says. “We understand that. That’s their business.”
His composure is drawn, in part, from the bank’s performance, which has been remarkably steady, given the enormity of the scandal. The bank’s valuation, while no longer at a premium, is on par with other big American banks and some early signs of growth are visible.
But Wells considers itself more than just another bank: it was on top of the industry in returns, valuation and reputation. The question is whether it can reach those heights again. And there, Mr Sloan faces a very sceptical audience.
“With these types of stories . . . the companies never get their premiums back”, says Dave Ellison, portfolio manager of the Hennessy Large Cap Financial Fund and an investor in financials for 30 years. “People have other places to go. Now Wells is just another big me-too bank.”
Perry Pelos, Wells’ head of wholesale banking, describes “the old Wells Fargo” as “a company that prided itself on decentralised decision-making. That’s good for certain things, but it’s not good for other things. The problem is we did that for everything.”
The description may understate some of the problems the bank has faced. An entrepreneurial culture, in which business units and managers were left to take decisions and pursue growth in response to local conditions, extended to controls and compliance. A strong culture of credit risk management was matched by precious little culture of operational risk management.
The scandal raised an unsettling question: what if the management structure responsible for Wells’ past success was ultimately unsustainable? By reputation, the bank had been better at assessing credit risk and had a stronger deposit-taking franchise than any other lender. It was one of the “big four” holdings at Berkshire Hathaway (along with American Express, Coca-Cola and IBM) and Warren Buffett had praised its “brilliant”, “outstanding” management.
This reputation was reflected in the stock valuation. In early 2016, Wells’ shares traded at two times their tangible book value, while Bank of America and JPMorgan traded between one and one and a half times book. Now Wells has traded down to Bank Of America’s level, and JPMorgan has risen to become the only big US bank trade at twice book.
Gerard Cassidy, a banks analyst at RBC, thinks that Wells’ radically decentralised structure, which led to the scandal, was also one of the reasons for the history of strong financial results.
“I don’t see the premium valuation coming back because of the way they do business now. They have put in processes that are an obstacle to that premium profitability . . . underwriting decisions were not centralised, a unique system that helped generate the extra returns.”
As the bank works to come in line with industry standards for controls and compliance, one employee describes a “sense that we’re stagnating”. “No real leaders have emerged to pull us out of wallowing in internal consensus-seeking. They sit on every problem and give us the same pep rally happy talk,” the employee says. Rivals say that Wells, chastened by its past mistakes, has become scared of its own shadow. Even Mary Mack, who runs Wells’ massive consumer bank, says staff are “still more cautious than you’d want them to be”.
Those closer to Wells, including 10 senior executives who spoke with the FT, argue that the bank’s core strengths in credit creation and deposit-taking remain. Mr Sloan points out that primary checking accounts — a key yardstick for what retail customers think of the bank — are increasing at a rate of nearly 2 per cent, recovering from zero growth immediately after the scandal broke, but still less than the 5 per cent in the two years before it. When Wells reports fourth-quarter earnings this week, investors will hope to see the momentum continue.
While loan growth hovered around zero after the scandals broke, it never tipped into negative territory. “Existing customers stuck with us,” says Ms Mack. Customer retention is at a multiyear high, she says. “It was with prospective customers choosing between us and another bank that we got hurt.”
Mr Pelos, the head of wholesale banking, agrees. “I’ve been in some awkward conversations, but by and large our customers have stuck with us. They know their banker. Our results have been OK because of that. New customers have been harder to convince.” He suspects the scandals have made corporate clients cautious, thinking to themselves: “’I’d hate to be the CFO that recommended Wells to my board and then something else happens.’”
Financial services is a sticky business. Customer relationships, once won, are hard to lose. Whether resilience of Wells’ franchise is down to this inertia or the unique characteristics of the company — its long history in small and mid-sized American communities — is open to debate.
Wells’ business proved sticky in another sense. Following the scandals, there was no exodus of executives. Several headhunters specialising in banks professed surprise at the low level of turnover at the top of the bank. “I’ve been heavily recruited for other jobs; the opportunities are great for people here,” says one senior executive at Wells on his decision to stay.
Wells’ key challenge, then, is winning with new customers. But that means getting back to selling — when an out-of-control sales culture is exactly what got the bank in trouble.
The bank’s leaders are acutely aware of the balancing act. Employees have “really adopted more of a compliance mindset and a customer experience mindset rather than a convert customers and expand the business mindset, because that was near the centre of what created problems,” says John Shrewsberry, chief financial officer.
Wells has another reason for optimism. Rupert Younger, who leads the Oxford Centre For Corporate Reputation, argues that consumers are much faster to forgive scandals of character — like Wells’ — than scandals of competence. “Wells will bounce back,” he says. “In two or three years they will be fine.”
Wells is, arguably, receiving closer scrutiny and tighter regulation on a sustained basis than any American bank ever has. As it overhauls its governance and compliance regimes, it is operating under two consent orders, one from the Federal Reserve Board and one issued jointly by the Consumer Finance Protection Bureau and the Office of The Comptroller of The Currency. The Federal Reserve, in an unprecedented move, has capped the bank’s balance sheet at $2tn until it is satisfied that adequate controls are in place.
All this amounts, according to one lawyer specialising in financial regulation, to “an open-ended policy experiment”. Executives at the company acknowledge that they are aiming at a moving target, as regulators will only know what is good enough when they see it. Asked if the bank was on the same page as the regulators, Mr Pelos says that in an “outline in a classical sense, for the big roman numerals, we absolutely are, but for the details . . . there is no checklist, no playbook for this.”
The sense that there is no clear endgame has been compounded by a steady flow of news reflecting regulators’ continued dissatisfaction with Wells. Most worryingly, in October the bank placed its chief administrative officer and chief auditor on leave, reportedly after the OCC sent each of them letters informing them that it would pursue sanctions against them. A former federal bank supervisor told that the FT that such letters, sent after regulatory intervention has been proceeding for years, suggested that regulators were still discovering problems, not just fixing them.
Politics plays into this mix. With the campaign for the 2020 election already starting, Wells Fargo will figure in the partisan conflict over President Donald Trump’s deregulatory agenda. Maxine Waters, the Democrat who has just become head of the House of Representative’s financial services committee, said last year that “something is terribly wrong” at Wells. In October, Elizabeth Warren, the likely presidential candidate who sits on the Senate banking committee, said the Fed should not remove Wells’ asset cap until Mr Sloan, who she says is “deeply implicated” in the bank’s scandals, is removed.
If the company cannot get the asset cap removed in the first half of this year, as it has promised investors, the pressure to remove Mr Sloan will become intense. The Fed refused to comment on any of its dealings with Wells.
“Who is qualified, who wants the job?” asks one analyst, listing potential candidates including former US Bancorp boss Richard Davis, PNC chief Bill Demchak, JPMorgan retail banking boss Gordon Smith, and former Goldman Sachs chief operating officer Gary Cohn. All have “no interest”, the analyst says.
Reports suggesting that Mr Cohn has already declined an approach are strenuously denied by the company. “It didn’t happen,” says Mr Sloan.
Yet the bank’s leadership knows it is at the centre of a political battle. “We got treated worse than companies who have killed people, because it’s good political fodder,” says Mr Pelos.
A timeline of scandals
Following articles in the Los Angeles Times describing sales practices at Wells’ branches in California, management flags the issue as a risk to Wells Fargo’s board. In the two years that follow “management reports did not accurately convey the scope of the problem,” according to the board’s own 2017 investigation. Between 2011 and 2016 5,300 employees are fired, somehow without the board’s knowledge.
September 8 2016:
Wells Fargo announces $185m in settlements with local and national regulators “regarding allegations that some of its retail customers received products and services they did not request”.
October 12 2016:
John Stumpf, the bank’s chief executive officer, resigns. He is replaced by Tim Sloan, a three-decade veteran of the group’s wholesale division.
The bank continues to disclose past cases of customer mistreatment in its mortgage lending, auto lending, and wealth management divisions.
February 2 2018:
Wells agrees to a consent order from the Federal Reserve Board, which includes a $2tn cap on its balance sheet until such time as the bank’s governance overhaul is approved by regulators.
April 20 2018:
Wells pays a $1bn fine to settle federal investigations into its auto and mortgage lending practices.
October 24 2018:
It places its chief administrative officer and chief auditor on leave, reportedly in response to letters from the Office of the Comptroller of the Currency — a bureau within the Treasury department — about the executives’ role in the sales practices scandal.
December 28 2018:
Wells reaches a $575m settlement over sales practices with attorneys-general in all 50 US states.