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Stumpf Is Out, but Wells Fargo & Co. (WFC) Is Ignoring This Crucial Rule

The first rule in dealing with a scandal is that you’re supposed to get ahead of it. Wells Fargo & Co. (NYSE:WFC) hasn’t heard of that rule. The bank has been consistently behind the curve since Sept. 8 in dealing with a scandal where its retail bankers opened up to 2 million phony checking and credit card accounts and charged real people for them.

Stumpf Is Out, but Wells Fargo (WFC) Is Ignoring This Crucial Rule

And it still is.

Yesterday, WFC said it jettisoned long-time CEO John Stumpf, without his bonus, and installed Chief Operating Officer Tim Sloan in his place. Sloan has been with the bank for 29 years. Already, skeptics are calling him “culpable” in what happened.

Since the scandal broke, WFC shares are down roughly 9% — a loss to investors of roughly $20 billion. The bank’s shares are down 15% over the past year, the worst performance among the big banks.

The pre-market reaction to Sloan’s hiring was positive (shares were up 1.6%), but they’ve since reversed to a loss of 1.6% and have a long way to go.

Sloan’s Game Plan for Wells Fargo

Wells Fargo had signaled this might be coming early in the week when it quietly released a press release making six members of the bank’s operating committee direct reports to Sloan. Sloan now faces the task of dismantling, then rebuilding, the retail bank’s culture, retraining 100,000 employees to reduce cross-selling pressure, and recruiting new people to at least replace the 5,300 who were fired while the scandal swirled. 

The last time I wrote about WFC, I suggested bringing in someone from Charles Schwab Corp (NYSE:SCHW) to change the culture. Sloan could still attempt an outright merger with a discount broker, or another bank with a solid retail reputation. Until now, the bank has only made incremental responses to a problem that resides deep in the bank’s culture, which includes alleged retaliation against whistle-blowers. The scandal is also now deep in the public consciousness, evidenced by a recent Saturday Night Live sketch.

But many investors see that selling culture as having created the bank’s stellar returns. The audience on Friday’s earnings call will not be investigators, but analysts asking what Wells is doing to make up for gains lost by taking a more ethical stance.

Bottom Line for WFC Stock

The next important milestone for Sloan will come in November when Berkshire Hathaway Inc. (NYSE:BRK.B, NYSE:BRK.A) CEO Warren Buffett is expected to issue a comment on the bank. Berkshire holds about 10% of the bank’s common stock, and Buffett recently said he only spoke with Stumpf about the problems for five minutes, indicating the problem was bigger than he thought.

Another milestone might be California renewing its relationships with the bank, which were suspended due to the scandal on Sept. 28. Having Presidential front-runner Hillary Clinton take her criticisms of the bank out of her stump speech would be another positive sign for Sloan.

Analysts have begun pricing the scandal into their earnings estimates. The “whisper number,” the highest hoped-for estimate, is $1.02 a share in earnings on $21.97 billion in revenue. That would be roughly in line with the $1.01 per share achieved in the June quarter. But the consensus estimate is that this will fall over the next two quarters to as little as 94 cents per share before beginning to rebound.

In short, analysts expect a turnaround to take time. Only half have it rated as a “buy” and four are telling people to sell the stock, despite its fall.

The big figure to look at remains the bank’s price-to-book ratio, which remains the highest among the big banks at 1.29, compared with 1.09  for JPMorgan Chase & Co. (NYSE:JPM). The Chase figure is the limit of Wells’ downside, and raising it will be Sloan’s challenge.

Dana Blankenhorn is a financial journalist who dabbles in fiction, his latest being The Reluctant Detective Travels in Time.  Write him at or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in WFC and SCHW.

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