Wells Fargo: repairing a damaged brand
Welcome to the financial times. Bake read a weekly podcast, featuring the best for long form reporting from around the world. I'm Caroline Grady from opinion and analysis desk Wells Fargo has lurched from one scandal to another and its valuation is no longer out of premium to other banks. The scandals have raised unsettling questions. Save Robert Armstrong, and Laura Newnan that many customers stayed loyal to the Bank. It's financial performance has improved. But to two trillion dollar cap on asset is still holding it back. This report is narrated by Robert Armstrong. 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 outside. The group, however is very different in interviews with the financial times, dozens of investors academics, competitor's and employees ease 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 cutthroat sales culture in the retail division, where perverse incentives lead employees to open millions of false accounts and miss sell. Other products was ignored or brushed aside by the board and senior management until the story. Went public in two thousand sixteen wells first response when the problems emerged was mass firings of lower level employees more than five thousand were forced out only after this bad apple theory, failed to convince regulators politicians or the public was there aboard overhaul the replacement of most senior leaders and an effort to rewire the banks culture other instances of bad behaviour continued to come. Alight at wells. And the Bank remains under tighter regulatory scrutiny than any other US lender in recent memory prominent politicians said that Mr. Sloan who led wells wholesale banking operation while the misselling 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, mid western style. He says when any politician is running for office they're trying to win. And when they do that, they will either mentioned us or not mentioned us to the extent that it's beneficial to their election. We understand that that's their business. His composure is drawn in part from the banks performance, which has been remarkably steady, given the enormity of the scandal. The bank's valuation will no longer at a premium is on par with other big American banks and some early signs of growth are visible, but wills 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. Sloane faces a very skeptical audience. Dave Ellison portfolio manager of the Hennessy large-cap financial fund and investor and financials for thirty years says with these type of stories the company's never get their premiums. Back. People have other places to go. Now wells is just another big me to Bank Perry. Pilose wells, head of wholesale banking describes the old Wells Fargo as a company that prided itself on decentralized decision making that's good for certain things. But it's not good for other things. The problem is that we did that for everything the description may understate some of the problems the Bank is 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 comply. Science 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 and praise. It's brilliant outstanding management in early two thousand sixteen will shares traded to times they're tangible book value while Bank of America and J P Morgan traded between one and one and a half times book. Now wells is traded down to Bank of America's level and J P Morgan has risen to become the only big US Bank to trade at twice. Book Gerard Cassidy banks analysts at RBC thinks that wills radically decentralized structure, which led to the scandal was also. So one of the reasons for the history of strong financial results. He says, 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 centralized a unique system that helped generate the extra returns as the Bank works to come in line with industry standards for controls and compliance when employee describes a sense, 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 chasing by its past mistakes become scared of its own shadow. Even Mary Mack, runs wells massive consumer Bank says staff are still more cautious than you'd want them to be those closer to wells, including ten senior executives who spoke with the F T argued that the bank's core strengths in credit creation and deposit. Taking remain Mr. Sloan. On points out that primary checking accounts, a key yardstick for what retail customers think of the Bank are increasing at a rate of nearly two percent recovering from zero growth immediately after the scandal broke, but still less than the five percent in the two years before it when wells reports fourth-quarter earnings this week investors will hope to see the momentum continue well loan growth hovered around zero after the scandals broke it never tipped into negative territory. Mrs Mack says existing customer stuck with us customer retention is at a year high. It was with perspective customers choosing between us and another Bank that we got hurt Mr. pilose, the head of wholesale banking agrees. He says 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 okay. Because of that new customers have been harder to convince he suspects the scandals have made corporate clients cautious. Thing 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 one are hard to lose. Whether resilience of wells franchise is down to this inertia weren't that unique characteristics of the company it's long history and small and mid sized American communities is open to debate wills business proves sticky in another sense following the scandals. There was no exodus of executives. Several head hunters specializing in banks profess surprise at the low level of turnover at the top of the Bank. One senior executive at wells says on his decision to stay I've been heavily recruited for other jobs. The opportunities are great for people here. Wells key challenge, then is winning with new customers. But that means getting back to selling win an out of control sales culture is exactly what got the Bank in trouble. The banks. Leaders are acutely aware of the balancing act. John Shrewsbury chief financial officer says 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 center of what created problems wills has another reason for optimism Rupert younger who leads the Oxford centre for corporate reputation argues that customers are much faster to forgive scandals of character like wells than scandals have competence. He says wells will bounce back 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 to 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 has capped the bank's balance sheet at two trillion dollars until it is satisfied that adequate controls are in place. One lawyer specializing in financial regulation says this amounts to an open ended policy experiment executives at the company acknowledged 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. pilose 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 disatisfaction with wells most worryingly in October the Bank placed it's 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 the F T that such letters sent after regulatory intervention has been proceeding for years suggested that regulators were still discovering problems not just fixing them with the campaign for the twenty twenty election already starting wills 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 representatives 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 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 one analysts asks who is qualified who wants the job listing potential candidates, including former US Bank Corp, boss, Richard Davis, PNC chief Bill DEM check. J P Morgan retail banking boss, Gordon Smith and former Goldman Sachs chief operating officer Gary Cohn. The analysts says all have no interest reports suggesting that Mr. Cohn has already declined an approach are strenuously denied by the company. Mr. Sloan says it didn't happen yet. The banks leadership knows it is at the center of a political battle. Mr. Pilo says got treated worse than companies who have killed people because it's good political fodder. Thank you for listening. If you have enjoyed this big read putt cast you can. Scribe on all the usual channels. If you're not already an F T subscriber. Visit F T dot com forward slash offer. For our latest subscription offers. This episode was produced by Caroline, Grady.