Question

How did the Wells Fargo scandal affect the company financially?

Please provide a financial ratio analysis

Answer 1

The Wells Fargo account fraud scandal brought about by the creation of millions of fraudulent savings and checking accounts on behalf of Wells Fargo clients without their consent. 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.

Also, Wells Fargo incurred additional costs for refunds and lawsuits:

• $6.1 million in refunds due to inappropriate fees and charges;
• $142 million in compensation to customers due to a class-action settlement;
• $480 million settlement of a shareholder class-action lawsuit;
• $575 million 50-state Attorneys General (AG) settlement for a combination of opening unauthorized accounts and charging for unnecessary auto insurance and mortgage fees.

Further, AG settlement charged that Wells Fargo had already paid $2.3 billion in settlements and consent orders, so its $575 million settlement brought the total to nearly $3 billion.

Following were effect on the company's financial metrics-

Metric	Nov-16	Nov-15	Change %
New consumer checking accounts	3,00,000	5,00,000	-40.00%
Consumer credit card applications	2,00,000	4,00,000	-50.00%
Interaction with branch bankers	28,00,000	32,00,000	-12.50%
Customer loyalty score	53.60%	61.40%	-12.70%
No. of digital sessions by customers	46,15,00,000	41,93,00,000	10.06%
Key metrices-	2016	2015	Change %
net income	21,938	22,894	-4.18%
Dilluted EPS	4	4	3.26%
Efficiency ratio	59	58	2.07%
Total revenue	88,267	86,057	2.57%
Pre tax pre provision profit	35,890	36,083	-0.53%
Net interest margin	2.86%	2.95%	-3.05%
Tier 1 leverage	8.95	9.37	-4.48%