Welcome to the 2020s! In our first Deception Spotlight of the decade, we highlight Wells Fargo (WFC) after the bank reported earnings on 14 January 2020 with a 73% uptick in deceptive language compared to their long term average (trailing 35 months). A nosedive in profits and ongoing concern about expenses drove shares down more than 5%.

WFC is the third largest US bank by deposits, the largest by branch count, and counts almost one third of Americans as customers. Though it benefits from scale, commands a leading share in household and SMB banking, and is less exposed to volatile capital markets businesses than its peers, WFC continues to struggle with legacy issues. This is reflected in analyst question topics that drove deceptive answers from management, which include mortgages, revenues, expenses, investment, risk, capital, cost, and gain.

Wells Fargo (WFC) – Deception Over Time

Changing of the Guard

With new CEO Charles Scharf now on the job following Tim Sloan’s departure, bullish long-term investors have been hoping for some resolve. Clarity of commentary is undoubtedly part of the wishlist that went undelivered as Scharf’s first earnings call registered a spike in deception to levels we haven’t seen from WFC since their 3Q17 call.

Given underwhelming performance, an absence of upside catalysts, and an unfortunate history of leaving promises undelivered, the clarity of management’s commentary could not matter more. With expense guidance pulled, low interest rates squeezing net income, nebulous visibility into future earnings growth, and bruised customer relations in the aftermath of a fraudulent account scandal, WFC’s turnaround is on thin ice – all while peers play offense.

We expect Scharf may still be getting his footing after boarding the Wells Fargo Wagon in the midst of a storm, but our hot take is that his tendency towards clarity in his previous management roles suggests scrutiny going forward as a proxy for ongoing tensions at WFC. Scharf’s average deception rate – the percentage of attributable extractions classified as deceptive – was 16% at Visa, 9% at BNY Mellon, and opened at 29% at Wells Fargo. That means that roughly 3 out of 10 extractions attributable to Scharf were classified as deceptive this time around.

For context, we visualize Scharf’s deception score and deception rate from 2015 to present below. We identify corporate affiliation for each period with color coding along the x-axis for ease of interpretation.

Charles Scharf – Deception Score & Rate

Illustrative Deceptive Commentary

Charles Scharf – CEO, Wells Fargo:

• "I don’t have all the answers yet, but I will share more as I learn more and as the year progresses…"
• "...I know you will want to know time frames and targets, but please understand that it’s too early after less than 3 months at the company. That said, we have just begun the process to rethink our plans for 2020 and beyond in a different level of detail."
• "...the path to success will be bumpy."
• "...when I say it’s really too early to be definitive about where we think about the level of expenses and what’s appropriate, I put this into the same bucket."
• "...it’s very difficult for you all to see what we have gained in terms of efficiency because you should just assume that our expenses would be substantially higher…"
• "...we’re just being very, very careful about leading you to a specific number because we’re not sure where that all nets itself out."
• "...I have to figure out how to spend my time in going back and figuring out if I was here, what I might have done differently. I’m not sure I would have done anything necessarily differently. I wasn’t in the seat. I don’t know what the priorities were. I don’t know what else was going on. That is a very, very difficult thing to do and, generally, something that’s very, very unfair to do."

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This communication does not represent investment advice. Transcript text provided by FACTSET and S&P Global Market Intelligence.

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