Question

How did the Wells Fargo account fraud scandal affect the company financially?

Please provide a financial ratio analysis

Answer 1

WELLS FARGO ACCOUNT FRAUD

Under pressure to meet sales quotas, the bank employees of Wells Fargo opened millions of savings and checking accounts in the names of actual customers, without their knowledge or consent. The fraud became public in 2016, but the scheme lasted more than a decade. It sometimes involved the movement of money out of legitimate accounts. In December 2016, it was also revealed that employees of the bank also issued unwanted insurance policies. These included life insurance policies by Prudential Financial and renters' insurance policies by Assurant.

FINANCIAL EFFECTS ON THE COMPANY

The number of new accounts being opened at the bank has plummeted. New consumer checking accounts reduced by 41% in November 2016 compared to the same month last year. The applications for consumer credit cards dropped by nearly half, or 45%.

Wells Fargo has paid $185 million in fines for the conduct, it removed all the sales goals in its branches, lost the ability to hire and fire executives or board members without regulatory approval, and suffered from a lot of negative publicity resulting from allegations that the bank punished employees who tried to bring the scandal to light.

Since the scandals emerged, the market has been punishing the bank. Before the crisis, Wells was the most valuable bank in the world, Since then, its price-to-book value ratio has fallen by 31%. Moreover, Wells lost market share to other banks.

Although the scam was really big but the effects on the financial health of the company were not much because of the long persisting image of the bank.

Metric	Q1 2017	Change (YOY)
Net revenue	$22 billion	(1%)
Provision for credit losses	$605 million	(44%)
Noninterest expenses	$13.8 billion	6%
Net income	$5.1 billion	(1%)

The bank's efficiency ratio, which measures the percent of revenue consumed by operating expenses, increased to 62.7% in the first quarter of 2017, compared with 58.7% in the year-ago period.

For the ratio analysis part, there are no such studies supporting the scam.