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'Badly damaged' reputation weighs heavily on Wells Fargo

Continued fallout from a sales debacle that has rattled Wells Fargo & Co. for a year further hurt its ability to win new customers, grow loans, generate fee income and expand revenue.

Third-quarter earnings weakness disappointed investors and left analysts wondering anew how long the aftershocks of a scandal that dates to the third quarter of 2016 will reverberate and when the San Francisco-based banking giant will turn a corner and begin growing revenue.

After posting its quarterly results Oct. 13, Wells' stock fell more than 3% in morning trading as the broader markets gained ground.

"It was a broadly weak quarter," Scott Siefers, a Sandler O'Neill & Partners analyst who covers Wells, said in an interview. On reversing revenue deceleration that spans all of 2017, he added: "It could very well be a long slog."

Wells posted third-quarter net income applicable to common shares of $4.18 billion, or 84 cents per share, down from $5.24 billion, or $1.03, a year earlier.

Aside from a $1 billion charge linked to previously disclosed mortgage-related regulatory investigations that cut into earnings, Wells said its third-quarter revenue fell nearly 2% from the previous quarter to $21.9 billion.

Despite recent rate increases, net interest income was down slightly from the previous quarter, as lending declined. Noninterest income, meanwhile, dipped 2% during the quarter on lower credit card, mortgage, insurance and other fee income.

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Wells CEO Timothy Sloan

Wells said it continued to see solid banking activity from existing consumer customers, but its struggles to win new clients and drive overall growth persisted in the wake of the sales troubles that have hung over the bank since September 2016, when regulators fined the bank and alleged that it allowed branch staffers to open several million phony accounts.

Following the fine, Wells acknowledged widespread problems and took several steps toward change. In addition to numerous other management and board changes, Wells parted company with its former chief executive, John Stumpf, and replaced him with former COO Timothy Sloan, who is now president and CEO. Wells also revamped how its pays and motivates retail employees, and it ramped up internal oversight and controls.

It also launched a further review of its business practices, and in late August, Wells said the examination found up to 3.5 million fraudulent accounts, up nearly 67% from an earlier estimate. During its third-quarter earnings call, Wells executives said the result further hampered its reputation. Wells also recently unearthed other significant problems, including unauthorized enrollments in bill payment services and auto insurance.

In Wells' community bank division, where the sales scandal developed and festered for several years, third-quarter net income sunk 26% from the previous quarter.

"The reputation is just so badly damaged," Mike Matousek, head trader at U.S. Global Investors Inc., said in an interview. "How do they turn it around any time soon? I don't know, it's just so tainted."

Matousek noted that Wells appears to be hanging its hat on technological innovation and new services, and he said that may well prove the only viable route to go. He said Wells' national footprint and far-reaching lines of business provide it a massive infrastructure that it can use to market and sell new offerings, making a turnaround possible in the minds of many investors. But, he said, as the poor top-line results for the third quarter remind, the recovery process may drag out for several more quarters, if not years.

Wells' Sloan, who has been CEO for about a year, emphasized on the earnings call that the bank is investing in and banking on cutting-edge tech and new services to attract customers' attention. He noted that, early this year, Wells became the first large bank in the U.S. to allow customers to use their smartphones to access ATMs without their debit cards. Throughout the year, he said, the bank has continued to roll out new offerings, from a simpler and faster online mortgage application to a new digital investment advisory product that will provide low-cost allocation, portfolio selection and rebalancing services when it is rolled out later this month.

Sloan said early reception of these efforts has been favorable. But, he added, Wells still faces a lengthy uphill climb. "We are seeking every opportunity to identify and fix any issues that we have with the company and make sure they're done correctly," he said.