Wells Attempts a Pivot to Growth -- WSJ

After months of focus on scandal, bank faces challenges in trying to expand business again

Wells Fargo & Co. has spent roughly nine months working to reform the sales culture that led to a $185 million fine, public humiliation and the departure of its chief executive. Now, the bank is confronting a new challenge: growing again.

So far, the San Francisco-based lender has focused on cutting costs and urging investors to be patient, though shareholders, analysts and some employees question how the bank will match its past performance without the sales tactics that got it in trouble.

Complicating the bank's challenge are broader factors including low interest rates and a sluggish U.S. economy. "If you turn the clock back 10 years ago, we were in an environment where the economy was growing more quickly and revenues, candidly, were a little bit easier to come by, " Chief Executive Timothy Sloan said during an investor conference last week.

Wells Fargo was fined $185 million in September by regulators for opening as many as 2.1 million accounts that used fictitious or unauthorized customer information. The bank and regulators disclosed then that the bank had fired 5,300 employees over five years for improper behavior including opening up accounts for customers without their knowledge.

Since the fall, the bank's revenue growth has slipped for the first time in years. Its shares are the worst performing of the four biggest U.S., banks both year to date and since the November election.

Asked about growth, a Wells Fargo spokeswoman noted the bank's diversified business model and strong, steady results as well as opportunities in its wholesale, wealth and investment management, and consumer businesses.

Getting the retail division right is crucial for Mr. Sloan and other Wells Fargo executives. It sits in the bank's community banking unit, which last year accounted for more than 50% of Wells Fargo's overall net income.

Wells Fargo's return on equity, a key measure of profitability, was down to 11.5% last quarter from its recent high above 14% in 2014.

Even as it contends with broader economic trends affecting all banks, Wells Fargo must address lingering and potentially distracting impacts of the scandal. Agreements with regulators have put the bank in a less likely position to ask for approval on certain deals it would have pursued in the past.

In December, the bank was sanctioned over its "living will" contingency plan, required of all banks, on how it would avoid a taxpayer bailout if it were about to go bankrupt. In March, it was downgraded on its ability and willingness to serve lower-income populations. The bank later passed the living-will test, and it is cooperating with other investigations.

As it moves ahead, Well Fargo has many among its 75,000 retail-bank employees who feel hamstrung by the company's new way of doing business. The bank eliminated product sales goals, concluding they had been emphasized too much and led employees to use questionable tactics to meet their numbers.

A new incentive-compensation system this year seeks to change the orientation of the retail division from lofty product-sales goals to a focus on customers' overall satisfaction. Employees are measured on customer service, customer usage and deposit growth, among other factors.

Questions, however, persisted about the new strategy and growth during the bank's Investor Day last month.

"It seems like a lot of what you're saying over retail strategy is pretty ambitious, and it seems like there's a fundamental tension between a lot of what you're trying to do," UBS Securities LLC analyst Saul Martinez said during the bank's investor day last month.

Mary Mack, the executive in charge of Wells Fargo's retail branches, responded to Mr. Martinez that there is "alignment" between the business changes she has enacted and the bank's growth plans. She also told analysts Wells Fargo was increasing its "loans, deposits and investments."

She is also focused on shifting the bank's culture through manager training this summer and recent executive shuffling in her unit. "We have to help people continue to get comfortable with the change and create clarity" for employees, she said in a recent interview.

In preparing for certain reviews recently, a bank finance manager advised some regional executives they should be prepared for conversations with Ms. Mack to shift from seeking stability postscandal "to growth and strategies around spurring growth," according to an April email reviewed by The Wall Street Journal.

Yet some employees have expressed concern it isn't clear how to drive new business absent the bank's prior emphasis on product sales. One executive said questions among employees include: "How am I going to grow the business...with these constraints? How do I do it in a way that doesn't appear to be sales pressure?"

Meanwhile, Wells Fargo's numbers are falling. In March, the most recent data available, consumer checking-account openings at Wells Fargo fell 35% and credit-card applications dropped 42% from a year earlier.

While the decline is less severe than seen soon after the September announcement, bank executives said last week that they don't expect the credit card business to bounce back for a few quarters. A spokeswoman noted that internal customer-loyalty scores had increased since the scandal.

Speaking at last week's industry conference, Mr. Sloan said it would take time for the company's postscandal approach to bear fruit. "You don't just roll out a plan to 75,000 people and say, 'Good Luck,' right?" he said. "There is a lot of management that is required to make sure that that plan is in place."

Write to Emily Glazer at emily.glazer@wsj.com

(END) Dow Jones Newswires

June 09, 2017 02:47 ET (06:47 GMT)