Fitch: Wells Fargo's Cross-Sell Strategy in Question
The fine was fully accrued for and represents just a fraction of WFC's quarterly earnings of approximately $5.5 billion. And customer damages appear limited, with $2.6 million refunded and with WFC earmarking up to $5 million to cover this and any additional required customer remediation.
While this issue is not new, as it was first reported by the media in 2013 and the Los Angeles city attorney filed suit in May 2015, the breadth of the issue is surprising. The Consumer Financial Protection Bureau's Consent Order disclosed that WFC opened up more than 1.5 million deposit accounts and over 500,000 credit card accounts that may not have been authorized. Further, this appears to be a significant breakdown in what Fitch has long viewed as a solid risk management infrastructure.
WFC's earnings profile has been superior to peers, in part due to its cross-selling culture. WFC recently disclosed that the company would eliminate all product sales goals in retail banking effective January 1, 2017. This change may impact the company's revenue streams in the future. While WFC emerged from the financial crisis in a much better position than similarly sized peers, we believe this issue creates reputational risk given the issue and allegations are understandable to the general public, in a way that misdeeds at other banks are not.
In addition, Carrie Tolstedt announced her retirement in mid-July 2016. She formerly ran the Community Banking business line, which included the branch network. It is unclear whether there will be further executive management departures. However, we expect this to be somewhat of a fluid situation, garnering a great deal of regulatory, political, and potential legal attention over the near term. While it is difficult to quantify the potential reputational damage to the company's franchise, Fitch will be monitoring the situation for potential rating implications.