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Wells Fargo under Tim Sloan still has far to go

Loans and deposits are down, earnings are falling, as is employee morale, and the govt is launching a probe

Mr Sloan has said repeatedly that those who think he shouldn't be CEO don't know what they are talking about. But he himself has appeared ill-informed.

WHAT'S the appropriate board gift for a CEO's two-year anniversary? If you're Tim Sloan at Wells Fargo, the correct answer is: a short leash. 

Mr Sloan took over the CEO role in mid-October 2016, which means the anniversary is this week. At the very least, he badly underestimated the problems facing his bank. But he's also been slow to address the issues that have come up since he took over, particularly with regulators, and has yet to fully solve them.

And while he  inherited a tough job, two years in, it's hard to find a single business metric that has improved.

Both loans and deposits are down. Earnings, too, are expected to fall 4 per cent this year from the year when he took the job, and that's including an estimated US$1.25 billion boost from this year's corporate tax cut.

During the same period, the bank's three main rivals - Bank of America, Citigroup and JPMorgan Chase - have each increased loans and deposits. Earnings at the three banks are up an average of 27 per cent.

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Shares of Wells Fargo - up 22 per cent, including dividends, during Mr Sloan's tenure -  have badly trailed rivals, which returned an average of 72 per cent in the same period. (Wells Fargo shares were starting at a higher valuation than its rivals.)

In another sign of Wells Fargo's troubles, its price-to-book ratio, which has been the highest of the big banks for much of the past two decades, now trails JPMorgan's.

Perhaps it's not a surprise that Wells Fargo would trail rivals, given the fake-account scandal that swept Mr Sloan into office. But Wells Fargo has also failed to meet its own targets, set well after management was aware of the problems.

Earlier this year, it predicted its return on equity would rise as high as 15 per cent in 2018. Instead, it is expected to sink to 11.7 per cent.

It also predicted its revenue would rise this year. Instead, analysts expect the bank's sales to fall 2 per cent.

But Mr Sloan's most glaring failure has been fumbling the bank's interactions with regulators. Observers say in his first year on the job, he failed to respond to regulators, nor did he take their investigations seriously enough. 

By mid-2017, Wells Fargo's top executives had reportedly convinced themselves that they had solved the bank's regulatory problems.

Since then, Wells Fargo has been hit with a consent order from the Federal Reserve that limits how much it can grow, as well as a US$1 billion fine from the Consumer Financial Protection Bureau.

The Fed, in its consent order, cited Wells Fargo's failure to correct deficiencies that regulators had previously pointed out to the bank as a reason the Fed went ahead with the consent order.

A bank spokesman called Mr Sloan's support from the board "unanimous" and unwavering. "In two years as CEO, Tim has driven significant transformational change at Wells Fargo, which is benefiting all stakeholders."

As signs of improvement, the spokesman pointed to a second-quarter presentation that showed a slight increase in customer accounts in the past year as well as an uptick in debit card transactions, neither of which is surprising in a growing economy.

But the presentation also showed that customer loyalty scores have dropped this year. As for bolstering risk controls, at its May investor day, Wells Fargo published a chart showing that investing in regulatory compliance was one of the bank's top priorities.

But the bar chart was not labelled with numbers or a y-axis. What's more, it showed that the bank plans to cut its investment in the area in 2018 and 2019. The 2017 bar is the tallest, but Wells Fargo has never disclosed what it invested in its risk management systems in 2016, so it's impossible to know whether it invested more or less last year.

Its financial statements show an US$800 million increase in 2017 on "regulatory and compliance related matters", but that includes spending on legal fees and other professionals.

Mr Sloan has said several times this year that those who think he shouldn't be CEO know little about either Wells Fargo or what they are talking about.

But he himself has seemed ill-informed, especially in his many "Mission Accomplished" moments.

In July 2016, roughly three months before he got the top job, and as the bank was negotiating a settlement with the CFPB over the fake- account scandal, he said in an interview that he didn't think the bank had a sales problem.

In February, he told Bloomberg Businessweek  that there was not much left to fix at the bank. And in May, Wells Fargo launched an advertising campaign stating it was a "new day at Wells Fargo". Since then, the bank has restructured its wealth-management division amid an investigation into sales practices there.

It disclosed that employees in its commercial banking division might have improperly altered client records. The bank fired a dozen employees for falsifying expense reports and is investigating many others. It has also suspended two employees for their role in potentially cheating the federally funded low income housing tax credit programme.

The Department of Justice is investigating. 

As for morale inside Wells Fargo, UBS Global Research recently released a study concluding that the bank's overall employee satisfaction score had declined significantly in the past three months to the lowest since 2015. The study also found that Mr Sloan's approval rating among employees was significantly below that of CEOs at rival banks. 

It's fair to ask whether, given the scale of its problems, two years is enough time to judge Mr Sloan's progress. But last week, another giant company - General Electric - which arguably has even bigger problems, sent its CEO John Flannery packing after just 14 months.

Mr Sloan will soon have 10 more months than that under his belt. It's time for Wells Fargo's board and shareholders to demand results. BLOOMBERG

  • This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

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