Wells Fargo Raises Its Tally of Fake Accounts -- WSJ

By Emily GlazerFeaturesDow Jones Newswires

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (September 1, 2017).

Wells Fargo & Co. said its sales-practices scandal was far broader than it had previously acknowledged, ensuring that the bank will continue to face scrutiny about a problem that has weighed on it for nearly a year.

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Wells Fargo said Thursday that 3.5 million "potentially unauthorized" customer accounts were opened as a result of improper sales tactics, a 67% increase over the 2.1 million figure it made public last fall.

The disclosure, made at the conclusion of a review of the misconduct, comes against a backdrop of fresh missteps within Wells Fargo's consumer-lending operations and significant underperformance in the stock market compared with its big-bank peers.

The sales scandal erupted last September when the San Francisco bank admitted that employees opened customer accounts using fictitious or unauthorized information to meet lofty sales goals. The revelation led to congressional hearings, the abrupt retirement of its then-CEO and a decision by the bank's board to claw back tens of millions of dollars in compensation from some top executives.

Wells Fargo said Thursday that it is providing $3.7 million in additional customer refunds as a result of the revised count of fake accounts.

"We apologize to everyone who was harmed by unacceptable sales practices that occurred in our retail bank," Wells Fargo Chief Executive Timothy Sloan said in a statement. "Today's announcement is a reminder of the disappointment we caused to customers and stakeholders," he added on a media call.

The latest disclosure is likely to keep the bank in the regulatory spotlight and boost the possibility of future congressional hearings, analyst Jaret Seiberg of Cowen Group Inc. wrote in a client note.

Although Wells Fargo agreed to a $185 million settlement with regulators last September, the sales-practices issues have sparked a number of federal and state investigations, including from the Justice Department.

Mr. Sloan, who took over from John Stumpf late last year, said on the media call that there aren't any updates on those investigations. The bank has said it is cooperating with the inquiries; Mr. Sloan declined to comment on conversations with regulators in light of its latest update. He also said the new account figures aren't likely to upend an agreement to pay $142 million to customers to settle a class-action suit.

Soon after the bank's announcement, Sen. Elizabeth Warren (D, Mass.), a frequent Wells Fargo critic, wrote on Twitter that the latest information is "unbelievable" and that the bank's "massive fraud is even worse than we thought."

She reiterated her earlier call for the Federal Reserve to remove all Wells Fargo board members who served during the problem periods and for further congressional hearings.

The bank's board has said the practices leading to the unauthorized accounts went as far back as 2002.

Democrats on the Senate Banking Committee had already called for such hearings to examine issues that have recently emerged at the bank in regard to insurance products. So far, Republicans, who control both houses of Congress and committee leadership posts, haven't said if they would agree to the request.

Mr. Sloan said Thursday that the bank is continuing to reach out to all stakeholders and "respond to questions and concerns that they have."

The bank called the completion of the review, conducted by an unnamed third party, "an important milestone," a view echoed by others. The fact that Wells Fargo is putting the scandal behind it "is a positive in our view," wrote Keefe, Bruyette & Woods analyst Brian Kleinhanzl, adding that "we now expect the trickle of new information to slow considerably."

Still, many investors remain wary. Wells Fargo's stock fell Thursday, lagging behind peers.

That continued a woeful period since the scandal unfolded. Over the past year, the bank's shares are barely changed. Meanwhile, its three big-bank rivals -- J.P. Morgan Chase & Co., Bank of America Corp. and Citigroup Inc. -- have notched an average gain for the period of around 40%. The KBW Nasdaq Bank Index is up about 28%.

Now isn't the time to buy Wells Fargo stock due to the poor sentiment surrounding the bank and drags on its business, said Christopher Walsh, an analyst at Buckingham Research Group.

Separately Thursday, regulatory filings from Vanguard Group showed it cast ballots earlier this year against Wells Fargo nonexecutive chairman Stephen W. Sanger and two other directors. In mid-August, Wells Fargo said that Elizabeth Duke, its current vice chairman, would succeed Mr. Sanger as chairman on Jan. 1.

Aside from the management and political upheaval, the sales scandal has also affected the bank's underlying consumer business.

The growth rate for new checking and credit-card accounts, for example, has fallen since last year's scandal to a year-over-year rate of about 1% to 2% in 2017's second quarter, Bernstein banking analyst John McDonald said in a recent report. That is compared with growth of 5% to 6% in 2016.

Mr. McDonald said that will hit revenue, weighing on card fees, net-interest income and deposit service charges.

In light of this, Wells Fargo has been forced to cut expenses, even as it tries to revive growth. Yet other issues have surfaced as the bank dug into the sales-practices scandal, adding to concerns.

Wells Fargo said in July it would reimburse customers for around $80 million due to problems in its auto-lending unit. These led to as many as 570,000 borrowers being improperly charged for insurance policies.

The bank also recently disclosed problems for so-called guaranteed asset protection products sold through car dealerships. Those could result in refunds to customers in certain states.

The auto-related matters already have brought fresh regulatory scrutiny and related class-action suits. As well, problems have come to light in recent months over policies and processes with mortgage customers where Wells Fargo required them to pay fees for extensions of interest-rate lock periods. Wells Fargo also said it is looking into practices with certain consumer "add-on" products like identity theft and debt protection, among other issues.

Wells Fargo said the increase in its estimate of potentially unauthorized accounts was partially due to it refining the analysis and methodologies used by an outside firm examining the problems. As a result, the number of potentially unauthorized accounts in the original 2011 to 2015 period grew to 2.55 million from 2.1 million.

After last fall's congressional hearings, the bank also said it would extend the time period under review to January 2009. That added 981,000 accounts that were potentially unauthorized.

The analysis also found around 528,000 potentially unauthorized online bill-pay enrollments, and the bank said it would refund an additional $910,000 to customers who incurred fees or charges.

Wells Fargo added that out of the 3.5 million total potentially bogus accounts, around 190,000 incurred fees and charges, up from 130,000 previously identified.

Write to Emily Glazer at emily.glazer@wsj.com

(END) Dow Jones Newswires

September 01, 2017 02:47 ET (06:47 GMT)