Bank Watch

How much will Wells Fargo scandal cost the bank? Analysts want to know

John Stumpf, CEO of Wells Fargo, center, exits the Rayburn House Office building after a House Financial Services Committee hearing in Washington, D.C., on Sept. 29, 2016. On Friday, Wells Fargo will hold its first earnings call since the bank agreed to pay $185 million in fines over a scandal involving unauthorized accounts.
John Stumpf, CEO of Wells Fargo, center, exits the Rayburn House Office building after a House Financial Services Committee hearing in Washington, D.C., on Sept. 29, 2016. On Friday, Wells Fargo will hold its first earnings call since the bank agreed to pay $185 million in fines over a scandal involving unauthorized accounts. Bloomberg

When Wells Fargo reports earnings on Friday, analysts will be eager to understand the financial costs from the bank’s ongoing fake accounts scandal.

Friday marks the San Francisco-based bank’s first earnings call with analysts since Wells agreed last month to $185 million in fines to resolve allegations employees opened unauthorized customer accounts from 2011 to as recently as this year. Analysts say they are not expecting the scandal to have a significant impact on the bank’s third-quarter results, but they say it’s unclear how the ordeal could financially impact the bank over the longer term as far as lost business and future legal costs.

Wells Fargo faces a bevy of probes following revelations about its sales tactics, including by the Department of Labor, Justice Department and state attorneys general offices. On Friday, analysts are likely to ask Wells executives to discuss costs that could arise out of those investigations.

“Will (management) be ready to size the earnings impact from the recent fallout?” Deutsche Bank said in a report Tuesday.

The bank had already set aside reserves for the $185 million in fines, but analysts have continued to knock down their estimates of the bank’s future profits. Since the Sept. 7 settlement, their expectations for 2017 adjusted earnings per share have dropped by 1.3 percent to $4.14, according to Bloomberg News. It was the largest decline among the six biggest U.S. banks.

Independent bank analyst Nancy Bush said management may not be able to provide many specifics on the scandal’s cost at this point.

“There may be some reserve building for legal reserves, settlements, etc.,” she said. “We’re going to be in a vacuum, I think, on this for quite a while.”

Wells Fargo declined to comment.

For the quarter that ended Sept. 30, at least, some analysts aren’t expecting the scandal to significantly mar financial results.

According to The Wall Street Journal, Wells Fargo held an hour-long call on Monday with 500 senior executives to discuss the bank’s strategy to move past the controversy.

The executives said growth in new retail banking business likely would be down due to the scandal, according to the paper, which reviewed a recording of the call led by CEO John Stumpf. But the executives added that efforts by some states to penalize the bank by suspending parts of their business weren’t having much effect, the paper reported.

“To say the last month has been difficult is an understatement,” President and Chief Operating Officer Timothy Sloan said on the call. “It’s going to be harder for a while, and we get that.”

California, Illinois, Chicago and Seattle have halted some business with the bank following the allegations against the bank. North Carolina’s treasurer has said the state is monitoring the situation, while U.S. lawmakers have called on Stumpf to resign and for Wells Fargo to be broken up.

As it seeks to repair its reputation, Wells has also ended sales goals for its bankers, which encouraged them to “cross-sell” multiple products to customers. What impact that will have on earnings is still unclear.

Marty Mosby, an analyst with Tennessee-based Vining Sparks, said the settlement will have “very minimal"” impact on Wells’ latest quarterly results, in part because the fines are being paid out of past earnings periods. In a positive for the bank, he said, customers and employees are not fleeing in droves over the scandal.

“Wells Fargo is a franchise that shareholders and analysts have known for years, and the power of that franchise has not diminished,” Mosby said. “What they don’t know is if some unknown lawsuit is going to brought against Wells Fargo.”

“That is going to be an outstanding issue. It’s one that everybody wants answered.”

Deon Roberts: 704-358-5248, @DeonERoberts

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