Wells Fargo: Dead Culture?

| About: Wells Fargo (WFC)

Summary

The WFC corporate culture is still in trouble, just less than before.

Its stock has got a huge boost from Trump.

Now WFC could be grossly expensive and still badly damaged.

Wells Fargo (NYSE:WFC) has been on a tear of late, with shares soaring over 20% in the last month, thanks in large part to Donald Trump's presidential election win. His future reign as president is thought to herald higher rates and less financial regulation.

The stock is now trading at 150% of book value, and now one of the most expensive big banks. This comes despite the fraud issues with WFC and the worry that the company is dead inside, with a tainted corporate culture.

However, the market has taken kindly to Donald Trump and what a Trump presidency will mean for financials. The odds of a rate hike in December (a positive for banks) is close to 100%, per fed funds futures. Plus, there's Republican controlled Congress, which means that regulation might be a bit more lackluster - and Elizabeth Warren (who took WFC to task in judicial hearings) will have less power.

Warren grilled former WFC CEO John Stumpf over WFC's aggressive cross selling of products and opening of fraudulent customer accounts. He's since resigned and WFC has tried to clean things up with the firing of 5,000 employees, but the corporate stains might go deeper than just that. There's decades of an aggressive sales culture embedded at WFC - that doesn't go away overnight.

During the period that fraud took place, employees were fired for calling the bank's ethics hotline to report other employees' unscrupulous sales practices. However, WFC only fired lowly employees, using them as the proverbial scapegoat. Only one area president was fired out of 120 area presidents, 50 regional presidents and 3 regional heads.

Cross-selling's been the key focus at WFC for nearly two decades, pushing customers to sign up for multiple WFC products. Supervisors have long been pressing lower level employees to sell more to meet quotas. Ex-CEO Stumpf was guilty of this, being sure to push managers to hit targets and congratulating them when they did. Those hitting their sales targets moved up faster - the culture became all about finding strategies to boost sales of products. Now, WFC is looking change its 'sales goals' and revamp its performance plan to include criteria like customer service and risk management.

Warren Buffett recently voiced his opinion on WFC, noting that Stumpf is a decent guy, but "made a hell of a mistake." Buffett went on to say that the big issue with Stumpf is that he didn't fix the mistake. It appears they still haven't fixed the mistake and it's something that could take years.

In the meantime, WFC shares has gotten ahead of themselves, especially over the last week, given the 'idea' that the investigations into the WFC sales practices will be muted under the new administration. But let's not forget that WFC was grilled by both Democrats and Republicans.

In the end, banking doesn't have to be complicated. WFC has gotten a big boost from the likelihood that rates will now go up sooner rather than later thanks to Trump. However, there are still corporate concerns and an expensive valuation that make WFC less than appealing. WFC will clean itself up and investors will forget all about this, but it takes time. And for us, the timing just isn't right. There's also the risk that WFC will over-correct its sales practices and become too conservative.

And there are already cracks forming in WFC growth. The number of new WFC bank accounts opened in October fell over 27%, compared to September. Compared to October 2015, the number of new accounts was down 44%. Then there's other side, where we've seen an uptick in closures. The number of account closures for October was up 3% from September This is a trend I expect to continue.

WFC - too far, too fast.

WFC's stock price has gotten ahead of where the company is; the corporate culture is still concerning and I'd expect WFC to drift lower from here. This also comes as WFC's strongest business - mortgages - should see a slowdown as housing tops out over the next 6-12 months.

I'd consider WFC 'interesting' at or below the $40/share level. At that level it would trade more in-line (versus a premium) to JPMorgan (NYSE:JPM), but would also offer a slight buffer to account for the corporate culture overhang. Even if the stock price doesn't come in toward more reasonable levels, the upside will likely be limited given the overhang and already premium valuation.

Meanwhile Bank of America (NYSE:BAC), for instance, could get an activist investor and still trades at a hefty discount to other big bank peers. Banking will likely be a solid and at least interesting industry to invest in over the next 24-48 months. With the help of less regulation and a scaling back of Dodd-Frank, banks will have excessive capital for dividend and buybacks and big banks will be 'safe' again, as opposed to the ill will toward the industry following the financial crisis. There are ways to capitalize, but WFC isn't one.

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.