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A New CEO at Wells Fargo Will Pay off for Investors With Patience

By Charley Blaine

Investing.com - Much of the news coverage about Tim Sloan's departure as Wells Fargo CEO on Friday is about who will succeed him.

As important is if Sloan's decision to retire after 31 years now will boost Wells Fargo (NYSE:WFC) shares.

The shares were up after hours Thursday after Sloan surprised Wall Street by announcing he was stepping aside as CEO immediately and retiring on June 30.

But there was no follow-through on Friday. The shares were off 2.2% even as the stock market was rallying in the best quarter since the 2008-2009 financial crisis.

Once, Wells Fargo was among the top-performing U.S. banks, widely respected for getting through the financial crisis intact. Then, an ugly fake account scandal erupted in 2016 and gutted the bank's reputation and relationship with regulators. Bank employees would open accounts in customers' names and assess them fees and other charges. Also, several hundred customers lost their homes to foreclosure due to a Wells Fargo computer error.

Since then, Wells Fargo stock has been a laggard.

It's up about 4% this quarter. But over the last few years, all its major peers, including JPMorgan Chase (NYSE:JPM), Citigroup (NYSE:C), Bank of America (NYSE:BAC), KeyCorp (NYSE:KEY) and US Bancorp (NYSE:USB) have done better.

Revenue has been flat in the last few quarters at around $21 billion. Earnings have hovered around $1.10 a share per quarter. The first quarter estimate of 32 analysts polled by Investing.com is $1.11 a share on revenue of $21 billion.

Sixteen of the analysts polled by Investing.com rate the stock a buy as of Thursday. There were just four with sell ratings. The consensus 12-month target is $56.70, which would be a 15.7% gain.

But, despite $1 billion in fines, nasty public scrutiny and even a Federal Reserve decision capping its growth, Wells Fargo has been slow to fix all its problems, probably because it's had to spend so much time finding them.

Critics in Congress haven't let up. Sen. Elizabeth Warren's reaction to Sloan's departure: "About damn time." Even the regulators publicly chastised the bank for being slow at fixing its problems.

Wells Fargo has a few things going for it.

It's not going broke. It has a huge branch network across the country. And a third of the shares are controlled by some of the biggest names in U.S. finance. The biggest is Warren Buffett's Berkshire Hathaway (NYSE:BRKb), which owns nearly 8.9% of the equity.

Elizabeth Duke, who chairs Wells Fargo's board, said the bank will look outside for a new CEO.

There are lots of the usual suspects being talked about to succeed Sloan, including Marianne Lake, JPMorgan's chief financial officer, and Matt Zames, president of private equity giant Cerberus and a former chief operating office at JPMorgan.

The perfect candidate will understand operations, how to communicate with customers and employees and be able to gain the confidence of its regulators.

The search will take time, which will hold the stock back, and the signing will be expensive, especially if the new boss has a lot of deferred compensation that would terminate if hired away.

With a new CEO coming and probably changing the management cadre, Wells Fargo has a shot to get its house in order and be able to leverage its considerable muscle. But the investor thinking about buying shares now must do so thinking very long term.

But Duke was hopeful on an investor call late Thursday.

“Somewhere there is a highly accomplished leader out there who is going to look at the challenge and opportunity and say ‘I’m a really good fit for Wells Fargo’ and we’re going to say, ‘Yeah, we believe that," she said.

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