No shortage of challenges facing Wells Fargo’s new CEO

Wells Fargo revenue after regulators capped asset growth 9/27/19
Register now

Charlie Scharf, the newly appointed president and CEO of Wells Fargo, said Friday that he has no preconceptions about the right strategic path for the scandal-plagued bank and will take the time necessary to make key decisions.

Scharf, who is stepping down as chief executive of BNY Mellon in order to take the top job at Wells Fargo, said that resolving regulatory issues with be his first priority, as it has been for his predecessor, interim CEO Allen Parker.

“Clearly there have been challenges,” Scharf said during a conference call with analysts, before adding that “Wells Fargo has many enduring strengths, and those will serve as the foundation as we improve our business.”

Wells Fargo’s board chose Scharf at the end of a six-month search process. He will become the San Francisco company’s fourth CEO in three years, following John Stumpf, Tim Sloan and Parker, who was named interim CEO when Sloan stepped down in March.

The board had pledged to hire an outsider, and Scharf fits the bill. He had been at BNY Mellon since 2017. Earlier, he served as CEO of Visa and was a longtime protege of JPMorgan Chase CEO Jamie Dimon.

In explaining the decision to hire Scharf, Wells Fargo Chair Elizabeth “Betsy” Duke cited his experience in strengthening operational risk and compliance functions. She also said that he has shown the ability to innovate in a rapidly evolving digital landscape.

“Charlie’s a proven leader and an experienced CEO ready to advance Wells Fargo’s continued transformation,” Duke told analysts.

Scharf, whose appointment becomes effective on Oct. 21, indicated that he had expected to be at BNY Mellon for the rest of his career.

“I certainly didn’t anticipate this opportunity coming along,” he said. “The opportunity to lead Wells Fargo, an institution that plays such an important role in the financial system, was one that I could not pass up.”

The 54-year-old Scharf, who in 2016 cited a desire to be closer to his family when he stepped down as CEO of Bay Area-based Visa, will continue to be based in New York.

He dismissed any suggestion that Wells Fargo’s CEO needs to live in San Francisco, noting that the company also employs thousands of people in Charlotte, New York, Des Moines, Minneapolis and St. Louis.

“I don’t think anyone would ever say in the places I’ve worked that I’ve not been present. I think it’s just the opposite,” Scharf said Friday.

In response to analysts who wanted more information Friday about the company’s strategic direction, Scharf said bluntly that he needs more time.

“What the priorities are going to be,” he said, “it’s just too early to know.”

But Scharf spoke highly of Wells Fargo’s business model, which includes large retail banking, commercial banking and wealth management units. “The fact that these businesses are under one roof is a wonderful thing, and they worked for Wells for a long period of time,” he said.

“I think the business model itself is fundamentally sound, and it’s a question of how we go about driving the business.”

Scharf joined Visa as its CEO in November of 2012 after a decade at JPMorgan, where he led retail banking before taking over an investment arm. He oversaw Visa during a time when the industry’s profits snowballed as consumers around the world increasingly turned to electronic payments.

At Bank of New York, he struggled to turn the trust and custody bank around, as shares are still below where they were when he took over more than two years ago.

At Wells Fargo, a critical first step for Scharf will be to work with the Fed to get a regulatory cap on the bank’s assets lifted, analysts said. The company’s assets have been capped at $1.95 trillion since February 2018.

“If we get to the end of the year and these issues are still outstanding, it will raise a question in our minds as to how long these issues will be out there,” said Christopher Wolfe, managing director and head of North American banks at Fitch Ratings.

Scharf is also inheriting problems in some of the company’s core businesses. Revenue dropped in four of the past six quarters, and loan balances have been falling over the past two years.

One key challenge will be to reinvigorate Wells Fargo’s sales culture, which was long a point of pride internally. Sales practices have been at the center of several of the scandals that have rocked the company over the last three years, including the revelations that as many as 3.5 million retail accounts were opened without customers’ consent.

Analysts are also waiting to hear from Scharf about to what extent, and within what timeframe, the bank’s expenses can be reduced. Wells Fargo said last year that it expected to eliminate 5% to 10% of its roughly 265,000 jobs by 2021.

In the eyes of Wall Street investors, Scharf may benefit from his track record as the CEO of two large financial institutions. As Wells Fargo’s secretive search process dragged on, some observers had anticipated that Parker would be made the company’s permanent CEO.

Following the hiring announcement on Friday, Wells Fargo’s stock price rose by 4.3% in midday trading.

“Mr. Scharf is already very well-known and respected,” Scott Siefers, an analyst at Sandler O’Neill, wrote in a research note.

It appeared Friday that Wells Fargo’s regulators, who were widely seen as having played a significant role in Sloan’s abrupt departure, also played a larger than usual role in the process of finding his successor. The bank said that the Office of the Comptroller issued a supervisory non-objection to the choice of Scharf, and that the step was required under an April 2018 consent order between the bank and the agency.

Scharf will be paid an annual base salary of $2.5 million, but his total yearly compensation figures to be far higher. He will be eligible for an annual bonus that can be as high as $7.5 million.

He will also be eligible for annual long-term incentive awards, with an initial grant of performance shares of $15.5 million in target value scheduled for February 2020.

In addition, Wells will pay Scharf a onetime stock award worth nearly $26 million to replace compensation that he forfeited for leaving BNY Mellon.

Scharf’s annual target compensation was set at $23 million, Wells Fargo said Friday in a regulatory filing, which is 40% higher than Scharf’s $16.5 million target pay in his final full year at BNY Mellon.

Sloan received $18.4 million in total compensation in 2018, according to an earlier regulatory filing.

Compensation has been a sensitive issue for Wells Fargo during its search for a new CEO. “Given the political sensitivity around Wells Fargo, it is something that will get scrutinized,” Wolfe predicted.

Additional reporting by American Banker’s Kate Berry and Bloomberg News

For reprint and licensing requests for this article, click here.
Wells Fargo Career moves C-suite BNY Mellon Financial regulations Wirehouses
MORE FROM FINANCIAL PLANNING