Question

How did the Wells Fargo scandal affect the company financially?

Please provide a financial ratio analysis

Answer 1

I understnad that there are two different & independant question viz

a) How did the Wells Fargo scandal affect the company financially?

b) Please provide a financial ratio analysis (Not related to Well fargo Scandal)

Ans a : Weels Fargo Scandal is all about creation of millions of fraudulent savings,checking & credit card accounts on behalf of their clients without their consent. This fraud became widely known in late 2016 after various regulatory bodies fined the company.

Wells Fargo clients come to know the fraud after they were charged unanticipated fees and receiving unexpected credit or debit cards or lines of credit.

The main reason for fraud was the focus of management to do "cross sell" of their products. Cross-selling means attempting to sell multiple products to same consumers. e.g a consumer with a checking account might be encouraged to take out a mortgage, or set up credit card.

Success by retail banks was measured in part by the average number of products held by a customer, and Wells Fargo was long considered the most successful cross-seller .

Well Fargo's employees were encouraged to order credit cards for pre-approved customers without their consent, The creation of these additional sale was made possible by setting the client's PIN to "0000", employees were able to control client accounts and were able to enroll them in programs such as online banking.

The fraud had wide impact on brand value of bank. It also impacted company's expenses in terms of fines & settlment amount over and above business loss. The Well Fargo is estimated to have incurred approximately $ 3B till date in terms of fine and compensation settlement to their customers.

Ans b : Financial Ratio Analysis

Fianncial Ratio analysis is a quantitative method of to evaluate company's liquidity, operational efficiency, and profitability by studying its financial statements.

Financial ratios are mathematical comparisons of financial statement accounts. Financial Ratio analysis help investors, creditors, and management to understand how well a business is performing and of areas needing improvement. Often ratio of one entity is compared with peers or industry for comparision.

Financial ratios are often divided up into various categories such as :

liquidity :  current ratio, quick ratio, working capital ratio etc.

solvency : debt-equity ratios, debt-assets ratios etc.

efficiency : turnover ratio, inventory turnover ratio etc.

profitability : Gross Profit ratio, Net profit ratio etc

market prospect :PE (Price Earning ) Ratio

Coverage : Debt service coverage ratio