In the grand scheme of things a $185 million fine won’t crush Wells Fargo & Co (NYSE:WFC). In fact, it may barely be measured as more than a blip. The bank generated $23.6 billion worth of revenue during Q2, and turned $5.2 billion — with a “B” — of that into net income last quarter alone. Some calculated the fine would shave two cents off the current year’s projected per-share bottom line, but Wells Fargo had been projected to earn $3.92 per share of WFC stock in 2016.
That’s only an adverse impact of about 0.5%. One better-than-expected quarter could more than offset the impending expense.
On the other hand, sometimes the smallest thing can gravely mar a reputation, and the ultimate cost to Wells Fargo will end up being far greater than a mere two cents per share of WFC stock.
Wells Fargo Did What?
For anyone not yet aware, the $185 million fine in question was imposed on Wells Fargo by the Consumer Financial Protection Bureau after the bank, for a period of years, opened new bank and credit card accounts for existing customers without their knowledge, so bank employees would meet their sales quotas.
And it was more than a few. Over the course of the last five years, the bank’s employees opened more than 1.5 million unauthorized deposit accounts, and more than half a million unauthorized credit card accounts. Wells Fargo will pay a total of $5 million in restitution of fees incurred by some of the unauthorized accounts. It’s the biggest such fine ever collected by the CFPB.
The bank humbly apologized to victims and non-victims alike, vowing to make the necessary changes to its internal controls, saying:
“Wells Fargo reached these agreements consistent with our commitment to customers and in the interest of putting this matter behind us. Wells Fargo is committed to putting our customers’ interests first 100 percent of the time, and we regret and take responsibility for any instances where customers may have received a product that they did not request.”
The bank also touted the fact that it has fired 5,300 employees for the practice.
It’s curious, however. Although the fine levied by CFPB and Wells Fargo’s public decry of the practice is new, the bank’s knowledge that it was going on at least to some degree isn’t new. As company spokesperson clarified, the 5,300 workers who were fired for opening unauthorized accounts weren’t fired in light of the findings of the CFPB’s recently conducted investigation. They were fired over the course of the five year period before the CFPB probe.
In other words, Wells Fargo knew — or at least should have known — this was a potential problem after the first few hundred employees were fired for doing it.
Said another way, Wells Fargo & Co doesn’t appear to be as sorry it did it. The bank appears to be sorry it got caught, not implementing changes until the Consumer Financial Protection Bureau made the matter a highly publicized gaffe.
Bottom Line for WFC Stock
Calling a spade a spade, it looks bad. While only a minority of Wells Fargo workers participated in the practice and most Wells Fargo customers did not end up as owners of accounts they never wanted in the first place, the headlines cast a shadow on the bank. It’s very likely would-be new customers will steer clear of the bank for a while, taking their business elsewhere.
Meanwhile, the matter may even stifle legitimate sales efforts.
As Sandler O’Neil analysts R. Scott Siefers and Brendan Nosal put it:
“While the settlement impact is very tiny, the event is a negative, nonetheless…[A] settlement of this kind still amounts to a rare blemish for a company that has for decades differentiated itself by its sales and cross-sell acumen. One risk is that, over time, any compulsion to soften that enthusiastic sales culture could lessen this competitive advantage. Further, anything that impacts investors’ confidence in the appropriateness of aggressive cross-sell can have a qualitative impact, as well.”
The good news for owners of WFC stock is, while consumers talk tough about abandoning companies, those efforts are usually short-lived. Many consumers tend to forgive and/or forget rather quickly, and seek to solve today’s problems rather than dwell on a company’s previous stumbles.
Said another way, for better or worse, this will all be a fading memory soon enough, replaced by the next sizzling corporate scandal.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.