Wells Fargo's Governance Overhang Makes It Cheap

The US bank that got it wrong back in the day is now trading at cheap multiples. And analysts may still be too pessimistic on its turnaround plan

- Petri Redelinghuys

Wells Fargo was once Wall Street’s biggest bank and a favourite of Warren Buffett. He still owns 3% of the company. At its peak, Wells Fargo had a market cap of over $300bn, today that is less than $100bn. The bank traded at a premium to its tangible book value; it was the highest-rated Wall Street bank when using this metric.

A scandal caused the company to lose its premium rating. After the financial crisis of 2008, the bank began to accelerate its cross-selling business. Cross-selling is when the bank uses its access to the customer and cross-sells multiple products to them.

With the push to increase, crossselling eventually got the better of the bank and led to many problems. Staff were heavily rewarded for cross-selling and penalised if they didn’t achieve daily targets. This led to shortcuts, where Wells Fargo’s staff eventually opened accounts on behalf of customers without their consent. In September 2016, Wells Fargo paid a $185m fine for having opened 1.5m checking accounts and issuing 500 000 credit cards without client consent. In February 2020 Wells Fargo settled with the US securities and exchange commission and the US department of justice for a $3bn fine.

Due to the scandal in 2018 the bank was barred by the US Federal Reserve (Fed) from exceeding $2tr in assets. This resulted in the bank having to cut $100bn in assets (normally loans to customers) in 2020 to avoid breaking this rule.