Question

How did the Wells Fargo scandal affect the company financially?

Please provide a financial ratio analysis

Answer 1

Wells Fargo fraud scandal

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.

Effects

On Wells Fargo management

The bank fired approximately 5300 employees between 2011 and 2016 as a result of fraudulent sales 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, he indicated he had no plans to resign.

Wells Fargo costs

The CFPB fined Wells Fargo $100 million on September 8, 2016, for the "widespread illegal practice of secretly opening unauthorized accounts." The order also required Wells Fargo to pay an estimated $2.5 million in refunds to customers and hire an independent consultant to review its procedures.

Wells Fargo incurred additional costs due to refunds and lawsuits:

On consumers

Approximately 85,000 of the accounts opened incurred fees, totaling $2 million. Customers' credit scores were also likely hurt by 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.

On non-management Wells Fargo employees

Wells Fargo employees described intense pressure, with expectations of sales as high as 20 products a day. Others described frequent crying, levels of stress that led to vomiting, and severe panic attacks. At least one employee consumed hand sanitizer to cope with the pressure. Some indicated that calls to the company's ethics hotline were met with either no reaction or resulted in the termination of the employee making the call.

Wells Fargo financial  Ratio analysis.

Name	Company	Industry
P/E Ratio TTM 9.74 14.03 Price to Sales TTM 1.39 2.89 Price to Cash Flow MRQ - 20.67 Price to Free Cash Flow TTM - 14.2 Price to Book MRQ 0.7 1.33 Price to Tangible Book MRQ 0.77 1.47
Profitability: TTM vs 5 Year Average Margins TTM (%) 5 Year Avg. (%) Gross margin operating marginPretax marginate Profit margin0%10%20%30%40%Operating margin TTM (%)22.19% 5 Year Avg. (%)33.6% Gross margin TTM - 72.24% Gross Margin 5YA - 81.44% Operating margin TTM 22.19% 29.59% Operating margin 5YA 33.6% 26.86% Pretax margin TTM 22.19% 29.65% Pretax margin 5YA 33.6% 26.93% Net Profit margin TTM 17.96% 21.67% Net Profit margin 5YA 24.98% 19.8%
Revenue/Share TTM 18.82 654 Basic EPS ANN 4.08 2.69 Diluted EPS ANN 4.05 2.66 Book Value/Share MRQ 44.6 3,174.42 Tangible Book Value/Share MRQ 35.84 2,920.23 Cash/Share MRQ 5.55 146.16 Cash Flow/Share TTM 4.28 51.08
Management Effectiveness: TTM vs 5 Year Average Margins TTM (%) 5 Year Avg. (%) Return on EquityReturn on AssetsReturn on Investment0%2.5%5%7.5%10%12.5% Return on Equity TTM 7.42% 9.17% Return on Equity 5YA 11.41% 9.67% Return on Assets TTM 0.75% 0.92% Return on Assets 5YA 1.16% 0.89% Return on Investment TTM - 4.71% Return on Investment 5YA - 4.83%
EPS(MRQ) vs Qtr. 1 Yr. Ago MRQ -99.15% -13.01% EPS(TTM) vs TTM 1 Yr. Ago TTM -37.88% 12.61% 5 Year EPS Growth 5YA -0.22% 8.77% Sales (MRQ) vs Qtr. 1 Yr. Ago MRQ -13.39% 7.29% Sales (TTM) vs TTM 1 Yr. Ago TTM -3.76% 3.25% 5 Year Sales Growth 5YA 6.8% 0.37% 5 Year Capital Spending Growth 5YA - 3.01%
Quick Ratio MRQ - 11.77 Current Ratio MRQ - 11.82 LT Debt to Equity MRQ 129.9% 105.04% Total Debt to Equity MRQ 180.4% 190.76%
Efficiency
Asset Turnover TTM - 0.27 Inventory Turnover TTM - 75.74 Revenue/Employee TTM - 4.69M Net Income/Employee TTM - 2.10M Receivable Turnover TTM - 4.76
Dividend Yield ANN 7.39% 3.28% Dividend Yield 5 Year Avg. 5YA 3% 2.59% Dividend Growth Rate ANN 8.22% 25.44% Payout Ratio TTM 51.23% 32.52

TTM = Trailing Twelve Months  5YA = 5-Year Average  MRQ = Most Recent Quarter