New Wells Fargo Chief Executive Officer to Face Immediate Leadership Test

New Wells Fargo Chief Executive Officer to Face Immediate Leadership Test

New CEO will present third-quarter results after less than 48 hours on the job

October 13, 2016

Tim Sloan, the new Wells Fargo CEO, is slated to present the embattled bank's third-quarter results to investors on Friday, less than 48 hours after he replaced former CEO John Stumpf.

Investors hope to be reassured that the bank will be able to rebuild its reputation and maintain profits while at the same time overhauling the high-pressure sales culture that caused a massive scandal over unauthorized accounts.

A History with the Bank

Sloan has been with Wells Fargo for almost 30 years, most of which were spent on the corporate and institutional side of the bank. This experience, together with his moderate temperament, instills confidence in his ability to steer the course of the embattled bank back to safe waters.

However, before his appointment to his new role, Sloan had been serving as the chief operating officer since November 2015, where he had oversight over the retail sales division in which employees opened millions of unauthorized accounts. Some of the accounts were opened while he was working as COO.

A large part of his success or failure will depend on how he balances the demands for larger returns coming from Wall Street with the clamor for change issuing from politicians and the public.

"The fact they have named him CEO indicates to me that he has at least passed some litmus test about his part in all of this and indicates to me that there was little or no part," said Nancy Bush, an analyst with NAB Research, which owns shares in the bank. "I know Tim, he has vast experience in every part of Wells Fargo and yes, I think he is the right man."

Costs of a Scandal

Wall Street is busy attempting to ascertain what the ultimate cost will be of the numerous probes into and lawsuits against Wells Fargo regarding the unauthorized accounts. So far, they have been relatively few in financial terms: last month the bank agreed to a settlement of $190 million, which represents less than one percent of its annual earnings. However, this settlement in itself led to several additional inquiries with which Wells must now grapple.

When bank management discusses the third-quarter results on Friday, it is expected that they will disclose the amount of money the bank has set aside for legal costs that it can predict within reason. At least nine different regulators, prosecutors, enforcement agencies, and congressional committees seem to be reviewing what the bank has done, according to a Bernstein Research report issued on September 26. These are in addition, however, to numerous private lawsuits filed by shareholders, customers, and former bank Wells Fargo employees.

"I don't think there will be a surprise to the downside in terms of the legal cost. The surprise will be that it's more than anyone suspects right now," said Holland & Co. President Michael Holland.

The settlement that the bank made on September 8 with the Consumer Financial Protection Bureau, the Office of the Comptroller of the Currency, and a Los Angeles prosecutor revealed that Wells employees had opened up to two million accounts in customers' names without their knowledge or consent. Wells fired 5,300 of those low-level employees for engaging in improper practices, and it is now working on changing risk-management protocol as well as pay incentives and training for employees.

Former Wells employees have compared the sales culture inside the bank to a pressure cooker in which managers forced staff to hit aggressive daily sales quotas. This practice, in turn, led some of the employees to open the illegal accounts.

Khalid Taha, a former personal banker at Wells who left in July after suing the bank over the sales pressures, believes that Sloan's installment as CEO does not represent a turning over of a new leaf for the bank.

"Wells Fargo's problems go from top to bottom," he said. "Sloan is part of that problem. I can't see him as a solution."

Harvey Pitt, former chairman of the U.S. Securities and Exchange Commission and founder of consulting firm Kalorama Partners, believes that government regulators will probably find abuses in additional parts of Wells besides retail customers as they investigate.

"The damage to customers could be much more significant," he said.

"It's not business as usual"

Reuters reported earlier this month that a probe conducted by Senator David Vitter had uncovered 10,000 small business customers who had also been victimized by improper banking practices.

Analysts say that it is hard to estimate how much the probes and litigation that the bank will face due to the unauthorized accounts will cost. It could be years before some issues will be resolved, and there are several outcomes possible.

However, most have cut profit forecasts for the bank due to scandal fallout. Thomson Reuters data shows that the average estimate for its 2017 net income is now $20.8 billion, a decrease of $300 million since September 7.

In addition, several state and local municipalities have publicly cut ties with the bank, including Illinois, California, Seattle, and Chicago. This does not currently appear to have impacted the bank's revenues, though some analysts expect other government bodies to take similar action in the future.

According to a presentation that Wells made to investors earlier in the year, less than one percent of its revenue comes from partnering with local governments, non-profit hospitals, and universities.

Wells has also lost some of its retail customers, said senior executives, but it is still opening more accounts than it is closing.

"It's not business as usual at Wells Fargo. There's an enormous amount of work to be done to regain the public's trust," said Thomas Russo, managing member at Gardner, Russo & Gardner, a top 50 shareholder.