Question

How did the Wells Fargo scandal affect the company financially?

Please provide a financial ratio analysis

Answer 1

Please mentioned below the answer

They also pointed out that the financial impact to the customer and the bank was extremely limited. Of the 2 million potentially unauthorized accounts, only 115,000 incurred fees; those fees totaled $2.6 million, or an average of $25 per account, which the bank had refunded. The Wells Fargo account fraud scandal is an ongoing controversy brought about by the creation of millions of fraudulent savings and checking accounts on behalf of Wells Fargo clients without their consent. News of the fraud became widely known in late 2016 after various regulatory bodies, including the Consumer Financial Protection Bureau (CFPB), fined the company a combined US$185 million as a result of the illegal activity. The company has faced and faces additional civil and criminal suits reaching an estimated $2.7 billion by the end of 2018.

Wells Fargo clients began to notice the fraud after being charged unanticipated fees and receiving unexpected credit or debit cards or lines of credit. Initial reports blamed individual Wells Fargo branch workers and managers for the problem, as well as sales incentives associated with selling multiple "solutions" or financial products. This blame was later shifted to a top-down pressure from higher-level management to open as many accounts as possible through cross-selling.

The bank took relatively few risks in the years leading up to the financial crisis of 2007–2008, which led to an image of stability on Wall Street and in the financial world. The bank's stable reputation was tarnished by the widespread fraud, the subsequent coverage, and the revelation of other fraudulent practices employed by the company. The controversy resulted in the resignation of CEO John Stumpf, an investigation into the bank led by U.S. Senator Elizabeth Warren, a number of settlements between Wells Fargo and various parties, and pledges from new management to reform the bank.

The bank fired approximately 5300 employees between 2011 and 2016 as a result of fraudulent sales,[21] and discontinued sales quotas at its individual branches after the announcement of the fine in September 2016. John Shrewsberry, the bank's CFO, said the bank had invested $50 million to improve oversight in individual branches. Stumpf accepted responsibility for the problems, but in September 2016, when the story broke, indicated he had no plans to resign.

Stumpf was subject to a hearing before the Senate Banking Committee on September 21, 2016, in an effort led by Senator Elizabeth Warren.[23] Before the hearing, Stumpf agreed to forgo $41 million in stock options that had not yet vested after being urged to do so by the company's board. Stumpf resigned on October 12, roughly a month after the fines by the CFPB were announced, to be replaced by COO Timothy Sloan.[25] Sloan indicated there had not been internal pressure for Stumpf's resignation, and that he had chosen to do so after "...deciding that the best thing for Wells Fargo to move forward was for him to retire...". In November 2016, the Office of the Comptroller of the Currency levied further penalties against the bank, removing provisions from the September settlement.[26] As a result of the OCC adding new restrictions, the bank received oversight similar to that used for troubled or insolvent financial institutions.[26]

Stumpf received criticism for praising former head of retail banking, Carrie Tolstedt, upon her retirement earlier in 2016, given that the bank had been conducting an investigation into retail banking practices for several years at the time. In April 2017, the bank utilized a clawback provision in Stumpf's contract to take back $28 million of his earnings. Tolstedt was also forced to forfeit earnings, though she denied involvement. Tolstedt was responsible for the pressure placed on middle management to dramatically increase the bank's "cross-sell ratio", a metric for how many accounts each customer had.

The bank experienced decreased profitability in the first quarter after the news of the scandal broke. Payments to law firms and other external advisers resulted in increased expenses. After earnings were reported in January 2017, the bank announced it would close over 400 of its approximately 6000 branches by the end of 2018. In May 2017, the bank announced that they would cut costs through investment in technology while decreasing reliance on its “sales organization”. The bank also revised up its 2017 efficiency-ratio goal from 60 to 61.

Tim Sloan later resigned in March 2019 under pressure related to the scandal.

Approximately 85,000 of the accounts opened incurred fees, totaling $2 million. Customers' credit scores were also likely hurt by the fake accounts. The bank was able to prevent customers from pursuing legal action as the opening of an account mandated customers enter into private arbitration with the bank. The bank agreed to settle for $142 million with consumers who had accounts opened in their names without permission in March 2017. The money repaid fraudulent fees and paid damages to those affected.

WFC Ratios
Title	Company	Industry
Valuation Ratios
P/E Excl Extra	6.81
Price to Book	0.69
P/E Normalized	6.71
Price to Sales	1.33
Net Debt	310,946
Price to Tangible Book	0.77
Profitability
Operating Margin	28.45%
Gross Margin	-
Net Profit Margin	23.56%
Pretax Margin	28.45%
Per Share Data
EPS Including Extraordinary	4.05
Cash Flow / Share	5.76
Cash / Share	5.26
Book Value Tangible / Share	35.65
Book Value / Share	45.27
Revenue / Share	19.22
Basic EPS	4.08	2.69
Diluted EPS	4.05	2.66
Management Effectiveness
Receivables turnover	-
Inventory Turnover	-
Return on Investment	-
Return on Average Equity	10.60%
Return on Average Assets	1.05%
Revenues / Employee	328,111.90
Net Income per Employee	77,303.76
Asset Turnover	-
Growth	-	-
Financial Strength
Total Debt to Total Equity	177.78
Long Term Debt to Equity	121.93
Current Ratio	-
Quick Ratio	-
Current EV/Free Cash Flow	-
Interest Coverage	-
Free Cash Flow	-2859
Efficiency	-	-
Dividend
Dividend 5 Yr Avg	1.62
Payout Ratio	0.4707
Dividend Yield	0.0739	0.0328
Dividend Growth Rate	0.0822	0.2544