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Wells Fargo CEO on internal scrutiny: 'We'll never say it's finished'


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Wells Fargo CEO on internal scrutiny: 'We'll never say it's finished'

Following a spate of customer-service failures that wounded Wells Fargo & Co.'s reputation and cost it earnings momentum, President and CEO Timothy Sloan said the company could make permanent its ongoing, post-scandal practice of examining its businesses for evidence of misconduct.

Responding to an analyst's question about when Wells may call an end to the internal critiques, Sloan said at a Dec. 5 Goldman Sachs conference in New York, "I think actually that we'll never say it's finished."

Sloan was promoted from COO to chief executive of the San Francisco-based bank after former CEO John Stumpf stepped down in October 2016 — roughly a month after regulators fined the bank and alleged it created a high-pressure environment in which employees felt compelled to open millions of phony deposit accounts.

In the months since, Wells first launched an internal review of its retail bank — where the fake-account openings mounted — and then expanded that scrutiny across the company, with an aim of rooting out malpractice and winning back the trust of customers, investors and regulators.

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Wells Fargo President and CEO Timothy Sloan

The inward reviews have unearthed more problems, showing that Wells is taking the process seriously but also amplifying the breadth of its troubles, analysts say. Regulators initially flagged some 2 million fraudulent accounts. Wells has since upped that estimate to as many as 3.5 million. And it has uncovered a range of other troubles, from erroneously charging auto loan borrowers for insurance to wrongly billing mortgage customers to extend interest rate commitments.

The attention generated from these findings has hurt Wells' ability to attract new customers and hindered its efforts to boost its earnings, analysts say. Third-quarter revenue and net income were both down from the previous quarter and down from a year earlier.

Wells' woes could deepen further. The Office of the Comptroller of the Currency in November warned Wells that it is considering a formal enforcement action against the bank over the auto-insurance and mortgage issues, according to a Wall Street Journal report. Heightened regulatory scrutiny would likely accompany such an action, increasing the likelihood of more problems getting identified.

"It's just not good to have regulators more encamped in your backyard than they already are," Scott Siefers, a Sandler O'Neill & Partners analyst who covers Wells, said in an interview.

Against that backdrop, Sloan's admission that internal examinations for wrongdoing could become ingrained practice is significant, said Gary Townsend, a Wells investor and GBT Capital Management founder.

"I interpret his remarks as, 'We're going to do what we should have been doing all along,'" Townsend said in an interview. He noted that Wells for years produced exceptional sales results, leaving competitors to wonder why such success could not be replicated. "How is it that Wells can do this and nobody else can? The answer is that Wells actually wasn't doing it either," he said, noting results were inflated by fraudulent accounts.

Putting permanent safeguards in place to avoid future fraud is positive, Townsend said. But it also likely means the public relations woe will drag on. "What else is to be uncovered? Something is wrong with the culture at Wells Fargo, so there is probably more to be found and repaired."

Sloan said at the conference that "we're well through" the process of the current inward review that emerged from the sales scandal. But he said that, in the past, Wells made the mistake of not looking critically at itself during periods of financial strength. He suggested that a lesson learned from the bogus account mess is that it cannot repeat that mistake.

"We didn't look critically enough on an ongoing basis at all of our businesses. So that's going to continue," Sloan said.

Separately, Sloan did profess confidence in the U.S. economy. He said that, while loan growth has proven difficult to generate, Wells is getting positive feedback from both consumer and commercial clients late in 2017. That is in part because the economy has sustained a healthy pace of growth this year. He said an anticipated tax cut now working through Congress could further boost GDP, upping the likelihood that Americans will invest in big purchases and that business will invest in expansion. Banks often finance such moves.

"We're optimistic about the continued growth," Sloan said.

Sandler's Siefers thinks Wells will eventually recover. But while troubles tied to a flawed sales culture still hover over the bank, "It is going to be hard to fully turn the ship around."