When Charlie Scharf took the reins at Wells Fargo five years ago, the bank was in turmoil. A series of scandals had put the 172-year-old bank under regulatory scrutiny, badly damaging its reputation and causing its stock price to fall by billions of dollars. Now in 2024, Wells Fargo looks like a completely different bank, and despite a dip after Friday’s earnings report, its recovery remains on track. Wells Fargo plunged more than 6% to below $57 a share after its quarterly net interest income (NII), a key indicator of lending profitability, missed expectations. Investors on Friday were more concerned about the weakness in NII than the better-than-expected results in second-quarter sales and earnings per share (EPS). The weakness in NII was offset by management’s emphasis under Scharf on fee-based businesses such as investment banking. But the bank had to raise its expense outlook for this year because the investment banking division’s revenue is tied to compensation. That’s a good problem to have.In a Friday earnings call, Wells Fargo Club raised its rating on Wells Fargo to buy 1, viewing Friday’s decline as an opportunity to buy the stock. Expanding into new markets has been a hallmark of Scharf’s tenure, along with a shakeup of senior management and improved relations with regulators. Taken together, they show how hard the CEO has worked to turn Wells Fargo around. Investors are taking notice. Despite Friday’s decline, Wells Fargo shares are up more than 15% so far this year, outperforming the 13% performance of the KBW Nasdaq Bank Index, which tracks the performance of major U.S. banks. Since Scharf was announced as CEO in September 2019, Wells Fargo shares have risen 12.5%, in line with the banking sector. In May, Wells Fargo’s stock price hit a multiyear high of $62.55 a share, just a few dollars below its all-time high of nearly $66 a share in January 2018. “Scharf has done a fantastic job turning around Wells Fargo,” said Jeff Marks, director of portfolio analysis at CNBC Investing Club. “Before he joined, the bank had a bloated cost structure, lagging technology and a bad reputation. Scharf and his team have right-sized costs, invested in technology, and significantly strengthened the bank’s risk management and controls.” A big part of Scharf’s job has been guiding the bank through all the regulatory hurdles put in place after the scandals of the late 2010s. In 2016, Wells was found to have had employees open millions of unauthorized bank accounts in clients’ names in an attempt to meet high-pressure sales targets. The Federal Reserve in 2018 ordered Wells Fargo to keep assets below $1.95 trillion and freeze its balance sheet until senior management reforms. The latest sign that Scharf is repairing the damage came in February, when the bank cleared a major regulatory hurdle related to its 2016 fake-accounts scandal. The bank said in a statement that the Office of the Comptroller of the Currency had rescinded a consent order, or penalty, that forced it to change how it sells retail products and services. That’s a “major achievement” and a big step toward lifting the Fed’s asset cap, Bank of America analyst Ebrahim Poonawalla said. “As we all know, solving regulatory problems is not easy for large companies. If the bank can remove the asset cap in the next year or so, I think it will further strengthen the credibility of Charlie and his leadership,” he added. The asset cap has constrained Wells Fargo’s growth, prohibiting the bank from expanding lending and increasing interest income. It also prevents the bank from acquiring other high-growth companies or making strategic investments that could boost its assets beyond the nearly $2 trillion threshold. To be sure, Scharf and Wells aren’t out of the woods yet. The bank has approved six of 14 consent orders from the Office of the Comptroller of the Currency. They don’t all have to be approved before the U.S. central bank can lift the asset cap, but more progress is still needed. Scharf said at a banking conference in May that Wells Fargo has eliminated aggressive sales targets and certain incentive plans at branches that initially induced bad behavior. The bank has paid billions of dollars to regulators over the years. In 2022, the Consumer Financial Protection Bureau ordered Wells to pay $3.7 billion just for violations of auto loans, mortgages and deposit accounts. But ultimately, it’s regulators who decide whether to lift the cap. “We have to end these orders. We have to create controls and make them part of the company,” Scharf said. “So we’re not declaring victory.” Moreover, Wells Fargo’s investment banking business, while growing, is small compared to other banking giants, which also reported Friday. Wells Fargo’s investment banking revenue rose 38% year over year to $430 million. JPMorgan Chase’s investment banking revenue surged 46% to $2.5 billion. Morgan Stanley, the other bank in the club, also has a larger IB division. The company will report earnings on Tuesday. But there’s still plenty to celebrate. Wells Fargo has fired most of its senior management from the pre-2019 era and restructured its board of directors. Eleven of the 15 members of Wells Fargo’s senior management team have joined since Scharf took over, as have six of the financial giant’s 13 directors. Poonawalla said the new hires will help change the company’s culture and restore a reputation for honesty and trust. “I think it’s good for the company not to have a very strong legacy. [in management] “If you look at the organizational structure, most of these executives are new to the bank during his time on the steering committee,” he said. Looking at the turnaround and how it’s playing out, he’s been able to attract a lot of talent from competitors. And I think that will help him as he turns the company around. Scharf’s plan to move Wells away from its traditional lending roots is also on track. According to a CNBC analysis in late May, Wells Fargo has hired at least 17 senior positions in its corporate and investment banking (CIB) division since the beginning of 2023. Under Scharf’s direction, the bank has poached top talent from Wall Street peers, including Scharf’s former employer, JPMorgan Chase. For example, Doug Brownstein, an M&A veteran who spent nearly 20 years at the bank, became Wells Fargo’s vice chairman in February, overseeing the bank’s corporate finance and advisory businesses. “Wells Fargo has historically been known as a mortgage bank, but it has taken steps to make itself less sensitive to the mortgage environment,” Raymond James analyst David Long said in a recent interview. “Charlie Brownstein has made at least 17 senior hires in Wells Fargo’s Corporate Investment Banking (CIB) division since early 2023,” he said. “His team has brought on several high-ranking bankers in the investment banking space, and we’re starting to see positive results in that regard,” he added. “We’re looking at a longer-term, higher-level approach to the bank.” [interest rate] “The current environment is not conducive to M&A and other investment banking transactions, but if interest rates start to fall, that business is likely to recover, and Wells would benefit,” he said. Thursday’s weak consumer price index report strengthened the case for the Fed to start cutting interest rates, raising the market’s view that there will be up to three cuts by the end of the year. Expanding into investment banking is favorable for Wells Fargo because it allows it to reduce its reliance on interest-based revenue, which is driven by the Fed’s monetary policy. Recall that management expects NII to decline 7-9% for fiscal 2024, and Friday’s second-quarter earnings showed that Wells Fargo is likely to be at the higher end of that range. This is because clients are moving capital into higher-yielding products as interest rates remain higher for a longer period. Instead, fee-based revenue, such as advisory fees on M&A deals and other IB transactions, is a more sustainable and less volatile source of revenue. “Fee revenue growth continues to offset the expected decline in net interest revenue,” Scharf said Friday. “The investments we’ve made have allowed us to take advantage of the market movements during the quarter with strong performance in investment advisory, trading and investment banking fees.” Marks said the executive’s strategy is “really working,” noting that second-quarter non-interest income grew 19% year over year, well above expectations. “Fee revenues are great, and we continue to see Charlie Scharf really focus on this area. He’s been on a hiring spree recently, including a number of former bankers from across the industry,” Marks said Friday. “He wants to get the bank less reliant on the yield curve and more reliant on fixed fee income, but that’s going to take time.” (Jim Cramer’s Charitable Trust is long WFC Mississippi. 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Wells Fargo CEO Charlie Scharf speaks at the Milken Institute Global Conference in Beverly Hills, California on May 2, 2023. Wells Fargo CEO Charlie Scharf speaks at the Milken Institute Global Conference in Beverly Hills, California on May 2, 2023.
Patrick T. Fallon | AFP | Getty Images
Charlie Scharf Wells Fargo Five years ago, the bank was in turmoil: A series of scandals had landed it under regulatory scrutiny, dealt a major blow to the 172-year-old bank’s reputation and caused its stock price to fall by billions of dollars.
Fast forward to 2024, and Wells Fargo looks like an entirely different bank. Despite the dip following Friday’s earnings release, the recovery remains on track.
