Wells Fargo's new boss hits the ground apologetically

Wells Fargo’s (WFC) new CEO Timothy Sloan struck a contrite tone on a conference call with Wall Street analysts on Friday to discuss the bank’s latest quarterly report. Most important, he’s vowing to overhaul Wells Fargo’s corporate culture, which encouraged thousands of employees to open phony customer accounts to meet unrealistic sales goals.

“We let down our customers, our shareholders and our team members,” said Sloan “We had serious problems in our retail bank, where products became the focus rather than the relationships with our customers.”

Fixing that problem means he clearly has his work cut out for him.

According to data released by the San Francisco-based company, new checking account openings fell 25 percent in September, when the scandal first broke, compared with August. Credit card applications plunged 20 percent, and customer branch visits have dropped by 10 percent. 

Shareholders have also taken a beating as the stock has tumbled nearly 17 percent this year, wiping out some $25 billion in market capitalization. Shares are now trading around $44.85, compared to their 52-week high above $56.

Although Wells Fargo’s quarterly earnings were down, they exceeded Wall Street’s consensus forecasts, but the scandal’s full impact and the accompanying costs on the bottom line aren’t yet known. And Sloan declined to disclose much information while the board’s independent investigation into its past business practices is underway. 

However, analysts at Keefe Bruyette & Woods argued in a note to clients, “we have to be skeptical about a bounce back in activity given all the changes ongoing within the consumer bank.”

Sloan, 56, became the head of the fourth-largest U.S. bank by assets two days ago after the abrupt resignation of John Stumpf, who had endured withering criticism by Sen. Elizabeth Warren, D-Massachusetts, and other members of Congress. Stumpf forfeited about $41 million worth of unvested stock awards, and Carrie Tolstedt, Wells Fargo’s former head of retail banking, agreed to forgo awards valued at $19 million. They both won’t get 2016 bonuses.

New questions are swirling, though, around a stock sale Stumpf made a month before the phony account scandal broke. That August sale netted him some $26 million.

Prior to becoming CEO, Sloan had worked for Wells Fargo for 29 years in a variety of roles not connected to the retail banking business. Most recently, he was president and chief operating officer. Previously he served as chief financial officer.  

“They have got so much digging to do to get out of the hole that they are in,” said Michael Useem, a professor of management at the University of Pennsylvania’s Wharton School.

But said Useem, “If you have somebody from the inside, they have a huge head start. They know where everything is buried. They know the culture. The advantage of an outsider is they bring a fresh eye.”

Other companies in a crisis of their own doing -- such as BP (BP) following the 2010 explosion of the Deepwater Horizon oil rig or Volkswagen’s (VLKAY)  recent admission that it cheated on emissions testing -- often turn to outsiders to replace CEOs who were tainted by the scandal, according to Useem. He added that he doesn’t have a “strong point of view” as to whether Sloan is the right person for the job.

A Wells Fargo spokesman said Sloan wasn’t available for an interview.    

In speaking with Wall Street analysts, Sloan noted that he appreciated the magnitude of the challenges that await him, including investigations by federal and state authorities. He said he wished the company had done more to address the retail banking issues sooner.   

“I have been in this role for less than 48 hours, and I want you to have high expectations for me. But I want to make sure that those are tempered,” he said.

Sloan declined to provide a timetable for when the board’s investigation will be finished and nor would he address media reports indicating that Wells Fargo management kept the board in the dark about the fraudulent business practices for years.

“We want to be very respectful of [the investigation’s] process,” Sloan said. “We want that process to be taken seriously and to be viewed independently.  … I don’t mean to be disrespectful to the media, but I don’t know if they have all the facts.”

Wells Fargo’s employees had been “put through the wringer” because of the scandal, and the bank was offering some who had been forced out by the company the chance to get their jobs back, according to Sloan. He declined, however, to discuss compensation strategy.

During the call, Sloan stayed calm after veteran bank analyst Mike Mayo of CLSA criticized Wells Fargo for not answering questions about how many customers were affected by the bogus accounts and how successful the bank was in retaining them.

“I am sorry we disappointed you,” Sloan said to Mayo, who is often critical of the industry

Before its recent scandal, Wells Fargo had taken pride in its reputation, and the bank had won Gallup’s Great Place to Work award for the past three years.