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Lackluster sales report caps another rough stretch for Wells

Wells Fargo & Co. continues to grapple with reputational damage in the wake of a phony-account scandal that dragged the banking powerhouse into the crosshairs of regulators, investors and customers.

The San Francisco-based company said in a Dec. 16 report that prospective customers continue to shy away from the bank's retail business, with new consumer checking account openings in November down 9% from the previous month and down 41% from a year earlier. New credit card applications in November ticked up 3% from the linked month but sunk 45% from a year earlier.

"We still have a lot of work to do to rebuild trust," Mary Mack, head of community banking for Wells, conceded during a conference call to discuss the latest consumer data.

Wells previously reported that retail customers in October opened 44% fewer new checking accounts than they did a year earlier. The bank received 50% fewer new credit card applications that month.

October marked the first full month of branch sales data since regulators announced Sept. 8 that they had levied $185 million in fines against Wells as punishment for allegedly allowing its staffers, working in a pressure-cooker sales environment, to open millions of deposit accounts and credit cards for customers without their permission over the course of several years.

The scope of that sales problem broadened in recent days with allegations that Wells staffers also fraudulently signed up Prudential Financial Inc. customers for life insurance without their consent. Prudential had worked with Wells to sell a simplified life insurance product through the bank's branches, but the insurance company said this week it had suspended its distribution agreement with Wells after discovering deceptive sales activity.

Additionally this week, the FDIC and the Federal Reserve rebuffed Wells' resubmission of its so-called living will, a roadmap that regulators require of major banks to show how they could feasibly manage their own bankruptcies without a taxpayer rescue should they falter. The requirement was put in place following a string of federal bailouts amid the 2008 financial crisis.

Wells was the only bank that regulators rejected a second time on this front. Authorities said the bank's legal structure remains too complex to efficiently negotiate a bankruptcy. They also criticized Wells for not fully addressing how its various businesses could operate on their own if the parent company failed, among other issues.

Shares of Wells inched ahead in morning trading Dec. 16, but prior to that they were down more than 3% this week.

"It is drip, drip, drip" in terms of the steady trickle of bad news investors have to absorb when it comes to Wells, Charles Wendel, president of Financial Institutions Consulting Inc., said in an interview. As such, he said, the bank could struggle well into 2017 with efforts to restore integrity, and that could weigh on its shares. "It's going to continue to be difficult for them."

The bank intends to file its living will again early next year. But in the meantime, regulators said they will not allow Wells to establish international bank entities or buy any nonbank subsidiaries. If the bank fails to make necessary fixes, it could face additional restrictions and penalties, possibly including requirements to divest assets.

During the Dec. 16 call, Evercore ISI analyst John Pancari said he has fielded questions from several clients on whether the living will failure could prove a precursor to trouble with the Fed's annual Comprehensive Capital Analysis and Review, or CCAR. The annual exercise assesses whether big banks have strong capital planning processes in place to account for their own unique risks should another severe downturn strike. A regulatory rebuke on this front could prevent Wells from deploying excess capital, including returning it to shareholders.

CFO John Shrewsberry, responding to Pancari on the call, said he was mindful of the need to demonstrate especially well to regulators that Wells has its arms wrapped around all possible risks, including potential revenue headwinds linked to the sales scandal. Should the fraudulent account matter result in sluggish income streams, such a development could result in weaker earnings-generated capital, he conceded.

But Shrewsberry added that if Wells does a "very thorough" job during the CCAR process as it has set out to do, he is confident the bank ultimately will show that it "achieved the objective there."

Skeptics loom large, however. Count among them Richard Clayton, research director at CtW Investment Group and a long-time Wells observer.

"It is still not clear just how broad [Wells'] problems are," Clayton said in an interview. "So I think it would be irresponsible for regulators to not be taking a very close and critical look at everything at Wells Fargo. … And under high scrutiny, I do not think the bank will be getting any benefit of the doubt from regulators, nor should it."