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Wells Fargo was once the darling of the US financial industry. Having emerged from the financial crisis with its reputation unscathed, and bolstered by the acquisition of Wachovia, Wells Fargo’s conservative nature post-crisis – so uninspiring for investors pre-crisis – with a wider geographical scale, attracted a premium rating.
It became the top mortgage and auto lender in terms of originations during the post-financial crisis period, and its retail banking business contributed substantially to the bank’s strong financial performance.
From the beginning of 2007 until September this year the bank’s stock price outperformed all of its biggest competitors: not just Bank of America and Citi, but even JPMorgan Chase.
However, with the revelation that some 2 million deposit and credit card accounts were fraudulently opened by thousands of pressured and underpaid sales associates, the question is: has the stagecoach turned back into a pumpkin?
Its stock price fell on the news – on September 2 it was trading at $50.55, but on September 14 it was $45.3 and by September 23 it was hovering around $45.8.
John Chiang, state treasurer of California, condemned the bank’s “venal abuse of its customers” and suspended business with Wells Fargo.
Analysts can’t seem to agree on the extent to which the scandal will cause long-term damage for Wells Fargo and its stockholders.
Positive view
Barclays analysts, in a report on September 15, listed a price target on Wells Fargo’s stock of $58, down just 5% from their previous target of $61, but fully 26% above the present trading price. Their positive view was based on: the $185 million settlement for the malfeasance having been fully reserved; the sales goals in the retail banks being changed; and a pick-up in fundamentals – such as the recent increase in Libor and strong mortgage originations.
Later that week Morgan Stanley analyst Betsy Graseck even went as far as to upgrade Wells Fargo stock to overweight, deeming it to be cheap, although setting a price target considerably lower than Barclays’ at $53.
Graseck says further fines are not expected, and that even if they were, they would not impair Wells Fargo’s ability to pay its dividend. Longer term, she says: “We wouldn’t be surprised if new consumer banking management found some opportunities to improve efficiency given Wells’ digital focus coupled with its largest-in-class branch footprint. Our price target anticipates that Wells can regain its 2x multiple point P/E premium to the group.”
Senator Elizabeth Warren called for the resignation of John Stumpf, chief executive, during a Senate hearing, pointing out that Stumpf had known as far back as 2013 that accounts were being fraudulently opened, yet in earnings calls in 2013, 2014 and 2015 had referenced the bank’s cross-selling ability as a reason to buy its stock.
Rafferty Capital senior analyst Dick Bove takes a much darker view. He says the bank’s run is over and that more investigations are going to follow. “There are many more questions that need asking beyond the hearing, and Warren isn’t the only one who will be calling for Stumpf’s head,” he says. “If Stumpf knew what was happening then what is to be said for the earnings that would have reflected those fraudulent accounts and the fraudulent cross-selling of credit cards? The 10Ks and 10Qs that were filed – was it known that the information filed was incorrect?”
Personal
Warren claimed during the hearing that Stumpf benefitted monetarily from the fraudulent activity, saying to him: “While this scam was going on, you personally held an average of 6.75 million shares of Wells stock. The share price during this time period went up by about $30, which comes out to more than $200 million in gains, all for you personally.”
Wells has said that Stumpf will forfeit invested equity awards worth $41 million.
Bove points to further questionable behaviour, saying: “How is it that these 550,000 odd credit cards that were given to clients without their consent were underwritten? And how did an IT department not pick up on 1.5 million deposit accounts opened with no activity following.”
If the board calls for Stumpf’s resignation, say analysts, chief operating officer Tim Sloan may replace him. Sloan is reportedly the executive who pushed head of retail banking Carrie Tolstedt to retire in July. He is also seen as having greater distance from the retail bank, where the scandal occurred, because he has largely worked at Wells Fargo on the corporate and wholesale banking side.
One analyst points out, however, that Sloan was CFO in 2013 when the fraudulent behaviour and excessive pressure on junior staff by sales management came to light. “Sloan is implicated within this whole scandal too. Wells Fargo has got itself in such deep trouble it’s hard to see how it can get out of it without replacing everyone at the top,” he says.
