M4 BARRON’S September 30, 2019
based on its business mix and footprint. In
the second quarter, BofA had a 57.5% effi-
ciency ratio, which measures operating
expense as a percentage of revenue. Wells’
lagged well behind at 62.3%.
Cost-cutting is just part of the challenge
for Scharf. Wells Fargo’s assets have been
capped by the Fed since February 2018 at its
2017 level of just under $2 trillion. At the
time, the Fed said the asset freeze would
stay in place until it was convinced that
“sufficient improvements” had been made.
The Fed and the Office of the Comptrol-
ler of the Currency didn’t think that Wells
Fargo was making those improvements un-
der Sloan, with both criticizing the bank’s
management in unusually stark terms.
Scharf won’t be able to win over regula-
tors on his own. And the implication of the
criticism was that management broadly, not
just the CEO, wasn’t up to the task. How
much of his own team Scharf can bring on,
and how much latitude he is given by the
board to push current executives out, will be
crucial to his success. Complicating that ef-
fort will be the decision to allow Scharf to
continue to work out of New York, while
Wells Fargo is based in San Francisco and
has significant operations in Charlotte, N.C.
Another implication of regulators’ com-
plaints: The bank wasn’t investing enough
in people and systems to overhaul its risk-
management and compliance processes.
That creates a tricky two-step for Scharf
to navigate. He may need to plow money into
those systems to get the asset cap lifted, but
investors are also baying for expense cuts.
The bank has indicated that it won’t focus
on expenses until its revenue increases,
which may be a coded way of saying it will
deal with regulators first and expenses later.
Still, Scharf, a protégé of Jamie Dimon at
JPMorgan Chase, will be well aware of
these tensions. If he is given enough time,
VITALSIGNS
Friday's Week's Week's
Close Change %Chg.DJIndustrials 26820.25 – 114.82 – 0.43
DJTransportation 10341.27 – 113.09 – 1.08
DJUtilities 876.46 + 13.56 + 1.57
DJ65Stocks 8933.90 – 21.14 – 0.24
DJUSMarket 734.69 – 8.48 – 1.14
NYSEComp. 12971.98 – 121.82 – 0.93
NYSEAmerComp. 2499.92 – 70.39 – 2.74
S&P500 2961.79 – 30.28 – 1.01
S&PMidCap 1922.74 – 21.90 – 1.13
S&PSmallCap 946.31 – 15.80 – 1.64
Nasdaq 7939.63 – 178.05 – 2.19
ValueLine (arith.) 6163.89 – 92.11 – 1.47
Russell2000 1520.48 – 39.29 – 2.52
DJUSTSMFloat 30293.19 – 376.58 – 1.23
LastWeekWeekEarlierNYSE Advances 1,315 1,621
Declines 1,733 1,428
Unchanged 52 55
NewHighs 294 234
NewLows 69 37
AvDailyVol(mil) 3,415.7 4,143.1
Dollar
(Finexspotindex) 99.13 98.27T-Bond
(CBTnearbyfutures) 162-110 160-280CrudeOil
(NYMlightsweetcrude) 55.91 58.09InflationKR–CRB
(FuturesPriceIndex) 175.72 177.34Gold
(CMXnearbyfutures) 1499.10 1507.30you’re a pessimist, you point to the fact that
the S&P 500 just created a dreaded “double
top” and will probably need corporate profit
growth to accelerate before picking up again.
“We haven’t seen much progress in the
market,” says Emily Roland, co-chief invest-
ment strategist at John Hancock Invest-
ment Management. “We need to see the
earnings engine kick in.”
We’ll get a few reports this coming
week—home builder Lennar (ticker: LEN),
PepsiCo (PEP), and Costco Wholesale
(COST) among them—but earnings season
doesn’t start in earnest until the middle of
October. Don’t be surprised if the market
continues to tread water until then.
Wells Fargo’s Next Chapter
Wells Fargo (WFC) is betting that the
third time will be the charm.
Two chief executives—John Stumpf and
Tim Sloan, a Stumpf deputy—fell on their
swords in the aftermath of a scandal over
fake customer accounts that tarnished the
bank’s reputation and put it in regulators’
crosshairs. Since March, the bank’s top law-
yer has been running it on an interim basis.
Now, an outsider has been tasked for an
overhaul: Charles Scharf, the president and
CEO of Bank of New York Mellon (BK),
will be Wells Fargo’s next CEO, effective Oct.
21, the bank said in a statement on Friday.
Scharf’s to-do list is short but daunting:
Get the Federal Reserve to lift its cap on
assets, repair relationships with customers,
cut expenses, and grow earnings.
The reward is potentially great. The mar-
ket has favored banks with large U.S. con-
sumer businesses. Bank of America (BAC)
is up 19% so far this year; JPMorgan Chase
(JPM), up 20%; and Citigroup (C), up 33%.
Wells Fargo shares have gained just 10.5%—
even after a nearly 4% gain on Friday.
BofA is the most similar to Wells Fargo
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