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Stock Analyst Update

Wells Fargo CEO Misses the Big Picture

In testimony before the Senate, Tim Sloan didn't clearly address whether management changes to date have been sufficient to overhaul Wells Fargo's corporate culture.

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In testimony before the Senate,  Wells Fargo (WFC) CEO Tim Sloan detailed the steps the company has taken to deal with the aftermath of the company’s fraudulent account scandal. In our view, the individual actions Sloan outlined were encouraging. Clearly, a poorly thought-out incentive plan was the proximate cause for the creation of millions of fake accounts and the ultimate firings of thousands of low-level employees. The bank appears to have remedied this problem, introducing a broader set of goals and incentives including measurement of customer satisfaction. The company also created a new office to investigate customer complaints and handle ethical issues. These actions should serve to reduce the internal pressures that led to the misdeeds.

However, one big question remains unanswered—whether management changes to-date have been sufficient to overhaul Wells Fargo’s corporate culture. On this front, Sloan was ineffective. Several high-profile allegations were not clearly addressed, including the firm’s treatment of whistleblowers, its use of private arbitration, and a court case involving the company’s attempts to maximize overdraft fees. We’re surprised that the CEO was not fully familiar with recent negative headlines, given the firm’s need to rebuild its reputation. Wells Fargo’s primary goal is now to “help [customers] be financially successful.” Yet, it was unclear how management ensures that the company’s financial goals are aligned with its customers’ financial needs. Even more than a simplistic set of sales goals, we believe this misalignment of incentives was at the root of Wells Fargo’s problems.

We still believe the wide moat company is attractively valued at a discount to our $67 fair value estimate and accompanied by a healthy dividend yield. Over time, Wells Fargo should be able to solve its problems and return to form—it is certainly not the only major bank to find itself temporarily mired in controversy over the last decade.

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Jim Sinegal does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.