Wells Fargo: The Smoking Gun Won't Change Anything

| About: Wells Fargo (WFC)


It appears Buffett has been quietly at work.

Former CEO Stumpf is out.

We now have a new CEO but the corporate culture still reeks.

Finally, FINALLY, Wells Fargo (NYSE:WFC) CEO John Stumpf is out. It's hard to see Warren Buffett, WFC largest shareholder, not having played a role here. Stumpf as just two years away from the mandatory 65 year old retirement age. It was an easy play that WFC hoped would be a 'show of good faith.'

It's not; Stumpf's exit makes WFC a more investable company. The stock is one of the most 'expensive' banks in terms of valuations and it's still got a corporate culture problem. Again, no one person will fix WFC overnight. Ideally, we would've seen an outside CEO come in, with what would've been a show of strength and a real commitment to share things up.

I've talked about the Sequoia Fund bull thesis. They bought into the company because it's a growth machine (thanks fake accounts). Sequoia pointed out in the second quarter that WFC has six products per customer and checking accounts are growing at 5%, which is impressive growth for any $200 billion plus market cap company.

Per the Sequoia Fund 3Q letter, they are taking the WFC crisis in stride. The fund notes that WFC has damaged its bond with customers, while also noting that only about 5% of the fraudulent accounts resulted in fees for customers (hey, great silver lining). Lest we forget that Sequoia is the same fund that stuck by Valeant (NYSE:VRX) throughout the crisis and criticism only to finally sell out over the summer.

WFC has been creating accounts and processing credit cards without customer approval since 2011. Although the fraud likely extends all the way back to 2006. Thousands of employees were involved. This is culture tarnishment that you don't simply wash away with the retiring of a CEO and firing of a few employees.

The culture is torted

The corporate culture at WFC is still tainted. Even with Stumpf gone, a new CEO, one from within the company (COO Tim Sloan), won't be able to clean house the same way an outside CEO could. Growth will surely slow as customers remain hesitant. Management has even said that new business will be down for awhile thanks to the scandal.

I'm still not finding WFC interesting at these levels, even after the new CEO and 15% stock price fall in 2016. It's the biggest home lender in the U.S., at a time when home lending isn't a sexy business to be in. I want a reason to believe that WFC can change. The bank's rampant fraud has been going on for awhile. It's not just since 2011, in fact there's evidence to suggest that WFC was creating false customer accounts in 2006. WFC knew, and knows a lot more, than they've let on. While that likely won't be enough to make WFC cheap enough to own, for now I'm considering WFC relatively dead money over the next few years.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.