How would you feel if your bank "help" you to open additional savings account or credit card facility without your authorization and annual fees are incurred on those extra accounts? Yes, you will feel mad!
That exactly what happened to one of the BIG FOUR banks in US, namely Wells Fargo.
2 million unauthorized accounts were found during investigation and Wells Fargo was slapped with USD185 million penalty! Although the sum is very small when compared against Wells Fargo's market capitalization (market value of the bank) of USD230 billion as at 19 October.
The bank is likely to suffer reputation damage and it will take some time to restore its reputation.
The Ex-CEO and Chairman John Stumpf has resigned. Prior to his resignation, he has been grilled by Senator, Elizabeth Warren in a tense exchange over the scandal and she even called him a 'gutless' leader as John Stumpf pushed for high cross selling number and imposed sky high target on his employees. Wells Fargo pushed for 8 accounts per one customer of which the target is way higher compared to peers.
If the Ex-CEO and other personnel behind this scandal are not criminally investigated, the same issue is likely to recur in the future in the absence of strict punishment as downside risk is absorbed by the bank while the executive would have reaped the rewards i.e high bonuses, stock options etc !
Apart from Wells Fargo, there are a lot of global banks which are in trouble with regulators as well due to their involvement in subprime financial crisis and other bad practices.
2 Key Lessons:
If i would like to be a shareholder of a bank, i would prefer the bank to possess at least the following attributes:
1) Ethical Leadership
Ethical leadership starts at the top. I would only invest into a bank which is run by top management with strong ethical values. How could we assess the bank's ethical leadership?
Look at their track record in managing the bank, their past experience, the performance of the bank, talk to the bank's staff to have some insight into how the bank is being run. Are the staff happy working for the bank?
Start to invest even just 1 lot (100 shares) of the bank's shares, attend the bank's AGM to ask question and observe how the directors or top management answer shareholders' questions. You can gain a lot of insight by just observing how the top management answer the questions from minority shareholders. Are they being transparent? or trying to avoid certain questions?
2) Bank's Ownership Structure
John Stumpf is not a founder of Wells Fargo, he was merely an employee of the bank. Sometimes, employee may make short term decision to boost the company's performance and hopeful for share price to increase, so that he could make more money by exercising stock options.
Various newsflow suggest that he has indeed made some profits by selling shares at higher prices while the scandal was going on.
I would prefer to invest into a bank which is largely owned by its founder. The founder would make sure the bank is well run because the ownership structure makes perfect sense for the founder to take a long term approach to grow the bank's business.
If Tony Fernandez 'destroy' Air Asia, there goes a big chunk of his wealth. hence it makes sense for him to make sure that Air Asia will perform well in the future in a responsible manner. If a CEO screws up at an airline that he is working for, the worst case that would happen will be ....yes, he would just resign, that's all.
If the founder put in a lot of efforts to grow the bank's business in a responsible manner, we should just sit back and enjoy the profit sharing from the bank in the forms of dividends and higher share price.
Conclusion:
The above are just 2 key lessons that i would like to share. By investing into bank which is largely owned by its founder, the risk of the bank getting itself into a scandal is likely to be lower, albeit it is impossible to remove the risk.
Banks that are enthusiastic in uplifting its corporate mission, are likely to win the heart of its customers (borrowers and depositors), hence better profitability and shareholders wealth is also likely to increase over time.
Which bank do you like to bank with?
this could be the first step to identify the potential bank to invest into!
No comments:
Post a Comment