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Wells Fargo slowly starts to shed the problems of its past

Wells Fargo's stock (WFC) is up 12% this year, outperforming all big bank rivals and within sight of an all-time high.

One big reason: Investors believe the San Francisco lending giant is slowly starting to shed some of the problems of its past.

It received a big boost last month when regulators with the Office of the Comptroller of the Currency lifted a consent order tied to a 2016 fake accounts scandal.

The move was a victory for CEO Charles Scharf, who said when he took over the top job in 2019 that his "first priority" was to clean up the messes left by his predecessors.

UNITED STATES - DECEMBER 6: Charles Scharf, CEO of Wells Fargo, testifies during the Senate Banking, Housing, and Urban Affairs Committee hearing titled
Charles Scharf, CEO of Wells Fargo, testifies before a Senate committee last December. (Tom Williams/CQ-Roll Call, Inc via Getty Images) (Tom Williams via Getty Images)

Scharf is now looking to go on the offensive as he tries to make Wells Fargo into a major investment banking player, edging deeper into a hyper-competitive business where it lags behind Wall Street giants like Goldman Sachs (GS), JPMorgan Chase (JPM), and Morgan Stanley (MS).

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Another push in that direction came this past week when Wells Fargo announced the hiring of M&A veteran Doug Braunstein, an executive Scharf knows from his days at JPMorgan when both Scharf and Braunstein were top lieutenants of Jamie Dimon in the tumultuous years following the 2008 financial crisis.

Braunstein knows what it's like to receive scrutiny from Washington. When he was CFO of JPMorgan during the "London Whale" trading debacle, he had to testify before Senate lawmakers in 2013. At Wells Fargo, Braunstein will report directly to the CEO as vice chairman.

"Doug is a world-class banker," Scharf said in a press release, noting that his "expertise and business relationships reflect our continued commitment to strengthen" Wells Fargo's Wall Street unit.

Michael Cavanagh, (L), the head of JPMorgan Chase Management Task Force Reviewing CIO Losses, and Douglas Braunstein, (R), Current Vice-Chairman and former Chief Financial Officer of JPMorgan Chase Bank, are sworn in at the Senate Homeland Security Investigations Subcommittee in Washington March 15, 2013. The Subcommittee is investigating JPMorgan Chase's Whale Trades.    REUTERS/Gary Cameron    (UNITED STATES - Tags: POLITICS BUSINESS)
Doug Braunstein, right, testified before a Senate committee in 2013 following sizable trading losses at JPMorgan, where he was CFO. REUTERS/Gary Cameron (Reuters / Reuters)

Not a 'light switch moment'

The CEO of the nation’s fourth-largest bank is not out of the woods with regulators, however. Even though Scharf has ticked off six consent orders that regulators had in place when he became boss, Scharf still has eight to go — including two added during his tenure.

The big one is a cap on the size of Wells Fargo imposed by the Federal Reserve. It can’t go past the $1.95 trillion in assets it had at the end of 2017 unless regulators say so. The Fed imposed the broad restriction in 2018, citing "widespread consumer abuses" at Wells Fargo.

Lifting that cap would allow Wells Fargo to boost activity in its capital-intensive markets business, CFO Mike Santomassimo said last Monday at a UBS conference in Florida.

"I would just caution that when it does happen, it’s not this kind of light switch moment," Santomassimo said, but "we do believe that there'll be some opportunity there." At the moment, "our focus is really to solve the risk and regulatory work first. ... We can't lose sight of that."

Several analysts who follow the bank said Wells Fargo is taking steps in the right direction, and they do expect the Fed to eventually take the bank out of the penalty box.

"They’ve done a tremendous amount under these highly idiosyncratic restrictions," said Scott Siefers, an analyst for Piper Sandler who has covered the bank over nearly two decades. "To reach the company's full potential, they will certainly need more freedom over some period of time," he added.

The timing for when the Fed removes Wells Fargo's balance sheet limit remains "hard to predict," according to Jefferies bank analyst Ken Usdin.

Even after this asset cap is removed, a second third-party review is required to assess the bank's improvements.

Cross-selling

The irony of Wells Fargo’s regulatory predicament is that there was a time not that long ago when it faced fewer constraints than its peers.

It was able to dodge many of the problems that hobbled other big banks during the 2008 financial crisis and became a coast-to-coast giant with its purchase that year of Wachovia, a big Charlotte lender weakened by a national mortgage meltdown.

The bank emerged from the crisis with a reputation for being conservative, not taking a lot of risks, and relying on a plain-vanilla, old-fashioned strategy of boosting revenue by cross-selling various products to existing customers.

But that strength turned into a weakness after it became clear in the second half of last decade that the bank had opened millions of bank and credit card accounts without customers’ knowledge as employees raced to meet their sales goals.

CEO John Stumpf, who had been with the bank for three decades, resigned and was later barred by regulators from the banking industry.

Wells Fargo CEO John Stumpf testifies before a Senate Banking Committee hearing on the firm's sales practices on Capitol Hill in Washington, U.S., September 20, 2016.   REUTERS/Gary Cameron/File Photo
Wells Fargo CEO John Stumpf testifies before a Senate committee in 2016. REUTERS/Gary Cameron/File Photo (REUTERS / Reuters)

His successor Tim Sloan left in 2019. He is now suing the bank in a California state court for $34 million, claiming the bank canceled stock grants and that Sloan was used as a "scapegoat" for the sales practices scandal.

The bank has said that it stands by its decisions and that "compensation decisions are based on performance."

The search for a replacement landed Scharf, who had been in charge of JPMorgan’s consumer bank while working for Dimon and then became the CEO of credit card giant Visa (V) and custody bank Bank of New York Mellon (BK).

Wells Fargo CEO Tim Sloan testifies before a House Financial Services Committee hearing titled:
Former Wells Fargo CEO Tim Sloan testifies before a House committee in 2019. REUTERS/Erin Scott (REUTERS / Reuters)

'A different company today'

His own overhaul has not been without surprises, including a $3.7 billion pact in December 2022 with the Consumer Financial Protection Bureau to resolve allegations that it illegally overcharged customers on their auto loans and mortgages. The actions at issue took place as recently as 2022.

Scharf has also significantly reduced the bank’s workforce. Since peaking during the pandemic in 2020 with 276,000 employees, Wells has eliminated roughly 18% of its headcount — or 50,000 employees. The bank’s CFO said this past week that Wells Fargo may also trim more real estate as a cost-cutting move.

There was also a new reminder this past week that the sales-practice scandal is still not totally behind the bank.

The company was sued in a San Francisco federal court by customers claiming the lender was not doing enough to assist those who were harmed by being signed up for products they didn't want.

The bank sent out letters asking for people to contact Wells Fargo if they had been enrolled in such products, but the lawsuit claims the letter burdens the customer to take action.

Wells Fargo tries "to avoid, reduce, and delay its ultimate liability and sweep under the rug its long-standing, intentional misconduct," lawyers representing the bank's customers stated.

The bank said it is still reviewing the legal claims. "Wells Fargo is a different company today, with new people, structure, processes, controls, and culture in place, and we have placed heavy emphasis on remediating customers for past practices," a spokeswoman for the bank added.

David Hollerith is a senior reporter for Yahoo Finance covering banking, crypto, and other areas in finance.

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