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Weighing Stumpf's survival odds and Wells' succession options

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Weighing Stumpf's survival odds and Wells' succession options

EmbattledWells Fargo & Co.Chairman and CEO John Stumpf has vowed to stay in his post and right the shipfollowing a phony-account scandal that resulted in big hits to the SanFrancisco-based bank's reputation, stock and confidence in its leadership.

Butamid repeated verbal assaults from lawmakers and a deluge of negativeheadlines, analysts and investors are wondering aloud if Stumpf can hold onto thejob. If he cannot, there is an additional layer of worry over whether Wellscould feasibly promote the executive waiting in the wings per the company'sclearly telegraphed succession plan or if it will be forced to start fresh withan outside hire.

"Thereis still time to recover and move on," ViningSparks analyst Marty Mosby said in an interview. He noted that Chairman andCEO Jamie Dimon, for example, endured heavy criticism following the 2012 "London Whale" controversy that cost thatcompany billions of dollars. But Dimon retained both his chief executive title and his seat atthe head of the board.

SNL Image
Timothy Sloan
President and COO, Wells Fargo & Co.

Source: Wells Fargo

Mosby thinks Stumpf can survive ifWells in coming weeks can show that it has its arms around the breadth of thesham account-opening scandal, for which regulators fined the bank $185 million.Authorities said the bank'spressure-cooker salesculture motivated front-line staffers to open troves of deposit and credit cardaccounts without customers' knowledge.

Stumpfhas since agreed to forgo more than $40 million in compensation, and Wellshas fired some 5,300 staffers linked to the fake accounts. The bank also saidit ended product sales goals for branch staffers this month, among otherchanges. Next up is earnings season. Mosby said that when Wells reports laterthis month, analysts and investors will want assurances that customers are notfleeing the bank, and that Wells has found ways to convince clients that itswoes are isolated and manageable, as JPMorgan did a few years ago.

That,however, is hardly a sure thing. In recent days, theState of Californiasaid it suspended Wells from participating in certain business relationshipsfor 12 months. The State of Illinois followed suit, saying it would suspend"billions of dollars in investment activity" with Wells.

Amplifying such news were scorching appraisals by U.S. Housemembers during a committee hearing last week. One after another, Democrats andRepublicans ripped into Stumpf. "Something is going wrong at thisbank, and you are the head of it," said Rep. Gregory Meeks, D-N.Y."You should be fired." Added Rep. Roger Williams R-Texas: "I'vegot one simple question for you: When are you going to resign?"

Against that backdrop, and amid punishing blows to a stockthat is down more than 10% since regulators announced the fines Sept. 8, doubtsare brewing about Stumpf'sfuture.

"He'sprobably going to be gone soon," Mike Matousek, a trader at U.S. Global Investors Inc. who tracks big banks,said in an interview. He noted that, unlike JPMorgan's past debacle, the Wellsproblem directly affected scores of ordinary customers — voters who lawmakers are eager to impress with ongoing pressure on thebank. "It's just such a big disaster."

IfStumpf steps down, Sloan, a Wells veteran of nearly 30 years, is the designatedreplacement. Late last year Wells promoted the former CFO and chief administrative officer from head of wholesalebanking to president and COO. Mosby said that, while another insider such ascurrent CFO John Shrewsberry could conceivablymove up to CEO, Sloan's 2015 promotion made him the heir apparent, andthere has been no word from the bank in recent weeks indicating that haschanged. "Ithink Sloan is really the only option internally," Mosby said. He notedthat most of Sloan's recent experience has been on the wholesale side as opposed to retail, where Wells' troubleslie. That could give Sloan "somecover" from the controversy and allow the bank's board to promote him ifStumpf leaves.

Thatsaid, as COO, Sloan works alongside Stumpf andshares in oversight and strategic planning for all of the company's majorbusiness lines. As such, he is not immune to the scandal. Mosby said that ifintense lawmaker and investor pressure persists well beyond earnings, the Wellsboard may determine it needs to wipe the slate clean and bring in a CEO fromoutside.

Mosbyand others think that holds little appeal at this stage because it could takeyears for someone from the outside to get up to speed on Wells' variousbusinesses and markets, all while trying to putout the fires of controversy. Talent turnover could mount and growth could cometo a halt. "They would be hitting the start-over button, and theywould have a lot to deal with for at least a couple years," Mosby said,adding that it is not clear who on the outside would be both qualified andwilling to step into the job under those circumstances.

Wells' lead independent director, former General Millsexecutive Stephen Sanger, could fill the role on an interim basis in the eventof a protracted search.

CharlesWendel, president of Financial Institutions Consulting Inc. and a formerbanker, agreed with that assessment. He said in an interview that while hethinks Stumpf "should survive" because of his myriad accomplishmentsin growing Wells over the years — and because achange could cripple future growth — the CEO may decide he needs to step downif the controversy drags on. Wells might then have to look outside for areplacement.

"Ido not think that is the first option, though, for anyone makingdecisions" at Wells, Wendel said. Given the bank's size and complexity,"it absolutely would be very difficult for someone on the outside to comein and do that job. And it could be hard to find the person willing to doit."