Every bank claims that its culture gives it a competitive advantage, but in most cases, this isn't true. For culture to act as such, it must serve as the foundation for tangible and measurable traits that clearly distinguish one bank from the pack.
"If I have any one job here," says Wells Fargo (NYSE:WFC) CEO John Stumpf, "it's keeper of the culture." This doesn't mean that Stumpf rides around in stagecoaches. He means that he's there to ensure that Wells Fargo operates prudently and efficiently; that it abides by the Wells' way.
This approach dates back to Carl Reichardt, who steered the bank through a gauntlet of banking crises that caused 2,800 banks and thrifts to fail from 1982 to 1992. It was Reichardt's leadership that convinced Warren Buffett to become Wells Fargo's largest shareholder at a time when analysts and commentators were speculating about its demise, as Buffett explained in his 1990 shareholder letter:
With Wells Fargo, we think we have obtained the best managers in the business, Carl Reichardt and Paul Hazen. In many ways the combination of Carl and Paul reminds me of another -- Tom Murphy and Dan Burke at Capital Cities/ABC. First, each pair is stronger than the sum of its parts because each partner understands, trusts and admires the other. Second, both managerial teams pay able people well, but abhor having a bigger head count than is needed. Third, both attack costs as vigorously when profits are at record levels as when they are under pressure. Finally, both stick with what they understand and let their abilities, not their egos, determine what they attempt.
The stories of Reichardt's obsession with efficiency, which serves as the foundation for all other aspects of a bank's success, are legion. He wouldn't pay for a Christmas tree in the executive suite. He also didn't allow new executives to renovate their offices, as is standard fare on Wall Street. This is what Stumpf means when he talks about being the keeper of culture. It isn't just a vacuous phrase that pays lip service to a corporate cliche; it has meaning and substance.
Here's how American Banker described Stumpf when it named him its 2013 Banker of the Year:
John Stumpf, a banker who earned almost $23 million last year, is cheerfully picking the stuffing out of a cracked leather armchair in his office. The chair, inherited from an even more frugal predecessor, is the most decayed of a worn set around Stumpf's conference table, a perfect set piece for his brand of subtle showmanship. He revels in his humble surroundings, proudly pointing out the "shabby" decor and rust-red carpet ("very '70s") of his yellow-lit executive suite.
Asked if Wells Fargo would ever upgrade its San Francisco headquarters or consolidate its scattered offices around the city into a gleaming flagship, something to rival Manhattan's spaceship-like Bank of America (NYSE:BAC) tower or its elegant new Goldman Sachs building, Stumpf scoffs: "That's not us."
While Wells Fargo's extraordinary performance over the years speaks for itself, nothing illustrates the virtue of its approach more than the success of U.S. Bancorp (NYSE:USB), the most profitable big bank in America right now. The $422 billion bank follows a nearly identical cultural playbook to Wells Fargo. This is no coincidence given that current CEO Richard Davis' predecessor once worked for Reichardt.
U.S. Bancorp has expanded this into an even wider moat. Beyond its industry-leading efficiency, and obsession with risk management, the Minneapolis-based bank has built among the largest and most lucrative payments and wealth management businesses in the financial industry. Absent an unforced error, U.S. Bancorp seems unassailable from a competitive standpoint.
Slight variations on this approach also explain how M&T Bank (NYSE:MTB) has produced Buffett-like returns since 1983, the year its current chairman and CEO Robert Wilmers took the helm. The 82-year-old CEO has always understood the role that efficiency and prudence play in banking, but he took it to the next level by parlaying the advantages gleaned therefrom into an untarnished track record of bargain-basement acquisitions.
Wilmers has exploited every banking and financial crisis of the past three-plus decades to expand M&T Bank's franchise for pennies on the dollar. He bought banks and thrifts during the savings and loan crisis, the Asian and Russian crises of the late 1990s, and most recently during the financial crisis of 2008-2009. His current tally is 23 acquisitions. All of these, insofar as I'm aware, have added to shareholder value as opposed to subtracted from it, as the vast majority of acquisitions tend to do.
Just as importantly, Wilmers' team has embedded M&T Bank's culture into each of its acquisitions. CFO Rene Jones emphasized this point during a recent conversation. "We pair every employee of the acquired bank up with an M&T employee, and often ones that came to the bank through past acquisitions," said Jones. "It's a pay-it-forward type of approach." Thus, just like Wells Fargo and U.S. Bancorp, M&T Bank's extraordinary success doesn't derive from claims of an amorphous and immeasurable culture. It comes, instead, from the tangible manifestations of that culture -- efficiency, prudence, and an opportunistic approach to acquisitions.
I'd be remiss if I didn't mention that JPMorgan Chase (NYSE:JPM) approaches its trade in the same way. It became the biggest bank in America eight years ago on the back of CEO Jamie Dimon's extreme conservatism. He disdains wasteful spending, and obsesses over risk management and a fortress balance sheet. It's the same package of plays that Dimon used to turn Bank One around in the years before JPMorgan Chase acquired the Chicago-based regional bank. And it's this approach that empowered JPMorgan Chase to expand during the financial crisis while so many of its competitors retreated to lick their wounds.
The counterpoints to these examples speak volumes about not only the importance of a prudent culture, but also about the difficulty of eradicating imprudence once it takes hold. Bank of America and Citigroup (NYSE:C) have nearly failed in every major banking crisis dating back to the Great Depression. Most recently, Citigroup almost went under in the 1990s after it lent money to teetering South and Central American countries. Bank of America was on the verge of bankruptcy around the same time thanks to excessive spending, reckless lending, and an inverted yield curve. And of course, Bank of America and Citigroup would have both failed in the latest crisis if the federal government hadn't stepped in with hundreds of billions of dollars' worth of capital and loans.
The point here is that culture can indeed act as a competitive advantage. But that isn't because a bank's CEO pays lip service to the idea in a company's annual shareholder letter. It stems, instead, from the role that culture plays in fostering the tangible and measurable advantages of efficiency and prudence. As JPMorgan Chase's Dimon puts it: "You can say it all you want, but unless you do it, no one gives a damn."