Picking the Brain of Wells Fargo's (Likely) Next CEO
In an industry filled with combative personalities, Tim Sloan, president and chief operating officer of Wells Fargo, is strikingly low-key and even keel.
Sloan, 56, is widely viewed as next in line to succeed John Stumpf, the chairman and chief executive of the San Francisco company. Wells tapped Sloan for his current role last fall, placing him in charge of community banking, consumer lending, wealth management and wholesale banking.
Sloan has quickly risen through the ranks during his three-decade career at Wells. He has held a number of C-level positions, including chief financial officer and chief administrative officer.
By allowing commercial clients to authenticate via an eye scan, Wells Fargo is making a burdensome task simple. Secil Watson, head of wholesale Internet solutions, is pushing the bank to make digital banking easier for commercial clients.
The bank's new low-down-payment mortgage, an alternative to FHA loans, dispenses with the complex qualification requirements that have hampered recent efforts with low down payments by Fannie and Freddie.
The San Francisco bank isn't interested in making splashy investments in technology. At an investor day event Tuesday, Wells executives said they would focus on taking incremental steps to reduce costs and improve customer experiences.
But he does not want anyone to jump to conclusions about what is next.
"We'll see what happens," Sloan said during a recent interview, in his characteristic, soft-spoken monotone. "The board will decide."
Still, it is easy to see how Sloan's even-tempered demeanor is a key asset at a company that faces challenges on multiple fronts: new regulatory hurdles, near-constant pressure to innovate and ongoing problems in its energy book.
The company's first-quarter profits fell 6% from a year earlier, as it boosted its provision for problem loans in its oil and gas portfolio. Wells' total energy book was about $40.7 billion as of March 31; it accounts for about 2% of its total loans outstanding.
Despite the recent setbacks, Wells has no plans to change course on energy lending in the future, according to Sloan.
In fact, if oil prices hold steady at about $50 per barrel, Wells Fargo may even increase its exposure to the cyclical industry over the next couple of years, he said.
Sloan discussed CEO transition, as well as a number of other topics, during an interview at Wells Fargo's offices in New York on June 9. Here is an edited transcript.
You're viewed as next in line to take over as CEO. How are you handling the speculation?
TIM SLOAN: You know, I've worked at the company for 29 years. My experience has been that I just focus on the job at hand, and that's worked out OK. It's not a secret that we have a mandatory retirement age for our senior executives of 65. John [Stumpf, 62] has been very clear that his expectation is that he's going to retire when he's 65. I wish that wouldn't happen because he does such a great job. But that's the way the company operates.
Is the CEO role something you've always had in mind? Why do you want the job?
Well, I think being the CEO of Wells Fargo is the greatest job in the world. I think being the president and chief operating officer of Wells Fargo, to me, is the greatest job in the world. If you told me this was the last job I'd ever have with Wells Fargo, that would be absolutely fine with me.
Let's talk about oil. Prices are hovering around $50 per barrel. Does that mean the worst of Wells Fargo's energy problems are over?
I don't know. I think we'll know if the challenges in the industry have bottomed out two or three quarters after they have bottomed out. I think that anybody's ability to kind of call the bottom is just challenging.
I'm wondering, when the energy market stabilizes —
I wonder, too. The sooner, the better.
When it all shakes out, though, will Wells Fargo's approach to energy lending change?
Oh, it won't change. We're very focused on providing credit to our customers. The way to be successful in providing credit is to have a very long-term strategy ... which means, when times are good, you don't want to overlend. I've been with the company now for 29 years; this is my fourth of fifth cycle that I've seen. Each one is a little bit different. You just need to work through it and be there for your customers.
But your total energy exposure — will it change?
I don't know. It's going to be a function of growth in the industry. But it wouldn't surprise me. Let's just say that prices stabilize where they are. If you said to me, do I think that our energy portfolio would be larger or smaller today compared with two years from now? I think it would probably be larger.
Any concerns about the auto-loan market — or is it full speed ahead for Wells?
Yeah, we have concerns about the market all the time. Our portfolio was performing well. Generally, what you've seen historically, when you get to a point where the auto production and auto sales are at their peak — that's the point at least from my experience where you start to get concerned about lending. We have seen some extension in terms — not necessarily for Wells Fargo. We have seen some increase in loan-to-value. Again, we really haven't changed our underwriting.
But remember, our portfolio is a little bit different, because we tend to be a little bit more of a used -car lender than a new-car lender. New-car lending is where you generally see the most aggressive lending, because lenders are not only competing with each other, but they are also competing with the finance arms of the auto companies.
What's the credit profile of your auto borrowers?
The majority of our portfolio would be in the prime sector. We use different credit algorithms to make decisions than just the FICO score. So, for example, if you looked at our portfolio today, you'd say about 20% of the portfolio, just based on FICO score, would be subprime.
We actually look at that 20%, and we think about half of that is really not subprime because the borrower characteristics, either beyond their FICO score or the rest of their financial condition, our experience with them, and so forth would put them in the prime category. So we think about 10% of our auto portfolio would be subprime.
Have you scaled back lending in subprime?
Do you have any expectation that you will in the coming year?
No. We're more of a used-car lender — and we're very comfortable with that. What you tend to find is that used-car buyers are generally using that car to get to work, which is one of the reasons why the portfolio performed so well in the prior cycle. People wanted to continue to make their car payment because that's how they got to their job, and if they didn't have their job, then all heck would break loose.
But what we are very focused on is the Manheim index of used car values. There's been a concern — and a legitimate one — that the Manheim index would start to decline. Having said that, the last couple of months, it has actually increased, which has been a little bit of a surprise. But it's something we're watching.
When did you start using alternative data, other than just FICO scores?
Just as it relates to auto? We've been doing that for decades. Because when you think about making credit decisions, whether it's on a consumer or commercial basis, you fundamentally want to use your own experience with that customer, more than an independent scoring model.
With commercial customers, it tends to be kind of customer by customer. So for example, you could have a company that's performing very well today, but we don't do business with them because 10 years ago, we remember how they treated us when they had a problem. And we'll never forget.
Let's talk about regulation. I'd like to get your take on the Federal Reserve's recent commentary around requiring higher capital levels for big banks to pass the annual stress tests.
I don't think it will have a big effect. What [Fed] Gov. [Daniel] Tarullo talked about — which, by the way, wasn't a surprise, because there's been some discussion about applying the incremental SIFI buffer to CCAR for probably the last couple of years. So just on its face, if you took our SIFI buffer, and you applied it to our Tier 1 common equity as of the end of the first quarter, we were at 10.6%, which is well above the current requirements. If you added that buffer to the existing requirements, as of the end of March we would have had to have had 10.9% of Tier 1 common equity. That delta is really not that big.
On the other hand, one of the other changes we believe that the Fed is considering, and may be implemented at the same time, is the assumption that in their supervisory stress scenario we will continue to make the same capital distributions that we're making in a non-stress environment. We're not going to do that. If we got into an environment like we saw in 2008, we would stop buying our own stock back. We may or may not reduce our dividend.
So if both those occur at the same time, I don't think it's going to be a big challenge for us.
Another regulatory topic — living wills. The submission is due in October …
Yes, the resubmission. Any updates there?
We're going to resubmit. We've got work streams in place. I'm confident we'll be successful and do a good job of exceeding the regulatory expectations. But we'll find out.
I just want to get your thoughts on the "too big to fail" debate that's going on in various ways in the industry.
I think the political environment today makes the topic pretty complicated. It's "too big to fail," break up the banks, all kinds of things rolled into one. From our perspective, it really comes down to we don't think any institution should be "too big to fail" — at all.
I think this whole focus on "too big to fail" is a complete waste of time. In the current environment, we've got new regulatory reform that has been generally positive for the industry, particularly as it relates to something like resolution and recovery. We can debate whether any institution should have passed or failed any sort of test, but the fundamental process of having the regulators ask the banks to do a very thorough job of detailing the underlying operations of the company and provide the regulators with a playbook of what to do in the event of stress for that institution, I think that makes a lot of sense.
Let's talk tech. Wells has talked about releasing a robo-advisory product or service in the coming month.
I would say months. Well, my bet is sometime next year, maybe the first half of next year, we'll have a robo-adviser option. The genesis of that is that's the feedback that we're hearing from our customers. Some would like that kind of an option, and that's fine. If that's what they want, that's what we're going to give them. We don't believe that that means that human interaction in terms of investment advisory, whether it's to an individual or a family or an institution, is going to fundamentally end. It just means that some segment of consumers want that option.
Would you partner with a robo firm, or develop your own platform?
That's a good question. That's why it's not going to be rolled out next month. So we're looking at a variety of different options, [and] we haven't made a decision yet. But assume that sometime next year, again the first part of next year, we'll have that option available.
Is that thinking shaping the way you look at other products? What other things do you think are laborious for customers?
You know, we're always trying to improve customer service. Just think about it, which institution rolled out online banking first? Wells Fargo did. Which institution has been a leader in authentication? Wells Fargo is.
This idea that somehow fintechs have a corner on all the good ideas of the world, is silly. They have to be a lot louder about their products and services, because that's all that's all they do. Our business model is different, in that we've got this broad set of products and services. We want to make sure that everything works, so we're not going to talk about something until we're confident about it, we're ready to roll it out, we've piloted it, and so on.
How does Wells plan to recreate its strong sales culture in a digital environment?
By using data. For example, let's say you go to one of our ATMs today, and you access whatever you want to do. We might use data to look at the types of products and services you have, compare similar customers' products and services. And we might ask you a question at the ATM: "Hey, would you like to talk to the banker about X?" That's a way to do it. Now just apply that to phone bankers, apply that online, and apply that by mobile.
On the topic of cross-selling — Wells has come under scrutiny for its strong sales culture. Is there any sense that the bank has pushed that strategy to the limit?
No. Because when you think of our vision, it's to satisfy our customers' financial needs, and to help them succeed financially. We know a lot about our customers, and so doesn't it make sense that we would use our data and match it with our product set to try to broaden our relationship with our customer?
How we do it, how we talk about it, making sure that we do it correctly, and appropriately — and making sure we follow regulations — that will continue to evolve. But the fundamental strategy that we have is not going to change.
How do you strike a balance between properly targeting customers using data, but not seeming creepy?
Well, good question. We don't think of it as targeting or creepy. I personally don't think that anybody uses data as well as they could today, whether it's banks or not. We're going to go through a period of time where data will be used differently, and sometimes it might feel creepy — not just for banks, but for everyone.
But it's amazing to me — I was just having this conversation with my daughter over the weekend. She is very concerned about government surveillance, but on the other hand she's more than happy to tell her entire life story on Facebook to a lot of people who don't even know her. But she's my daughter, so she doesn't listen to me.
The way that we think about that is you've got to make sure that you have a risk-and-compliance overlay to any sort of customer data. That's how you guard against making sure that you're using data inappropriately. The way that you guard against the creepy part, of what you described, is just kind of new product introduction 101. Before we're going to roll out any new product, we're going to test it, and we're going to get customer reaction. One of the nice things about having 268,000 team members is that that's a great place to test your products. Because guess what, most of those folks — though probably not all — do business at Wells Fargo.
We haven't talked about your GE acquisition. Any updates there — and are you considering other portfolio or nonbank acquisitions?
So I'll take the last part of the question. We've been fortunate to be able to continue to make acquisitions, because we've got sufficient capital and liquidity to make those acquisitions. We don't feel like we have to make any acquisition to continue to be successful, grow revenues and returns for shareholders, and the like. Whenever you feel like you have to do something, generally you're going to make a mistake.
The GE acquisition has gone — knock on wood — well so far. It's a multipronged acquisition. There was a real estate portion of it, there was a rail portion of it, and then even with the commercial lending businesses we bought, there were four different businesses and different geographies. I know there's a lot of excitement on the part of analysts, who are saying: "When are we going to see the results?" It's just going to take time. We want to do it right.