Question

How did the Wells Fargo account fraud 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. Wells Fargo clients began to notice the fraud after being charged unanticipated fees and receiving unexpected credit or debit cards or lines of credit.

Wells Fargo incurred additional costs due to refunds and lawsuits:

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

This brought total compensation cost on the COmpany to the tune of $ 3 billion.

Impact on key metrices are below:

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%