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Wells malpractice in focus as big banks prepare to report Q3 earnings

Analystsand investors of course will examine revenue and credit quality trends duringthe upcoming earnings season. But the fraudulent enveloping isexpected to cast a cloud over big U.S. banks when they report this month, withquestions swirling around cross-selling practices and whether executives areconfident that their retail staffs are responsibly serving customers.

WallStreet is hungry for detail-driven assurances that the Wells scandal — regulators in September stung the bank for openingsham accounts to boost sales figures — isconfined to the San Francisco-based company. Analysts say they have yet to seeevidence of similar sales troubles elsewhere. But they say large banks need tocollectively demonstrate they are operating virtuously to ensure that Wells'woe does not broadly stain an industry that has struggled to build up afavorable reputation since the 2008 financial crisis.

"Itis amazing how much this has spiraled over the last few weeks," ScottSiefers, a Sandler O'Neill & Partners analyst, said in an interview. Hereferred to a range of lawmakers calling for Wells Chairman and CEO to resign, as wellas regulators vowing to scrutinize sales practices across the banking landscape.

"Thisis clearly going to be a much greater focal point during earnings season,"Siefers continued. "This is going to be with us for quite some time, sothe more detail [executives] can provide during earnings season, the better.Analysts and investors, not to mention regulators and lawmakers and a host ofothers, will want more transparency around sales and incentive structures."

AnalystTimothy Coffey of FIG Partners said in an interview that while Wells has longbeen the industry leader in cross-selling —selling multiple products to each customer — and while Wells appears to havepushed its branch staffers too far on that front, the practice itself is not apoor one.

Customers often do benefit from the convenience of packagingtheir financial services with one company, he noted, and he expects to hearduring earnings season that other banks, while perhaps careful to make suresafeguards are in place, are committed to using the approach.

"Thereis nothing wrong with cross-selling," Coffey said. "Creatingfraudulent accounts is the issue, and I do not think that is ubiquitous in theindustry."

Steadyproduct sales growth, in fact, is important for banks in an era of low interestrates. Low rates continue to squeeze the profitability of loans, making volumecrucial for many banks to grow revenue, analysts say.

AnS&P Global Market Intelligence analysis of 20 major U.S. commercial bankingcompanies found that analysts on average anticipate that three-fourths of theselenders will post third-quarter revenue growth when compared with the previousthree-month period.

Analystsexpect that moderate overall loan expansion during the third quarter helpedbolster many top lines. While concerns have simmered about a slowdown inbusiness lending in recent months, analysts say commercial real estate andvarious categories of consumer lending are thought to have continued to advancesteadily in the quarter ended Sept. 30.

Whilecredit quality has proven strong for several years across the industry, andwhile loan losses are expected to remain low among the big banks through theend of this year, analysts on average do anticipate that credit costs inched upin the third quarter along with loan growth.

Analystsexpect that net charge-offs as a percentage of average loans crept up duringthe third quarter at 19 of the 20 banks in the analysis. Loan-loss provisions,while also at low levels at most lenders, likely increased at a majority of thebig banks, the analysis found.

Costsbroadly could be rising. Analysts expect that third-quarter noninterestexpenses climbed at a majority of the 20 banks in the analysis."I think you aregoing to hear a lot more about careful cost control," Siefers said.

Sieferssaid also said analysts will be looking for color during earnings season on netinterest margin outlooks, given protracted low rates that hurt NIMs but also arecent upside move in the LIBOR that could modestly benefit re-pricing of someloans.

Detailon energy loans also will be of interest, he said, given the recentstabilization in oil prices. Slumping prices had hurt banks in energy-centricmarkets in recent quarters.

Siefersalso said analysts are looking for strengths and weaknesses in loan demand, asloan volume has proven a vital contributor to many banks' top lines.

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