Wells Fargo's Year of Scandal Stretches On

A year after Wells Fargo & Co.'s sales-practices scandal erupted, the bank has changed its leadership and lost valuable ground to rivals. Yet executives still face an array of legal challenges that may take months if not years to sort out.

In recent weeks, the Justice Department has conducted interviews with executives in the bank's San Francisco headquarters, according to people familiar with the matter. The agency last fall began its investigation into the bank's practices after Wells Fargo entered into a regulatory settlement Sept. 8 over the widespread opening of accounts at the bank without customers' knowledge. Wells Fargo has been cooperating with that investigation.

Last week, Wells Fargo increased its tally of accounts opened due to improper sales tactics to 3.5 million from the 2.1 million initially made public last fall. The 67% increase in the fake accounts brought renewed focus to the scandal, which badly bruised the bank's reputation, led to the abrupt retirement of its then CEO and prompted many federal and state investigations separate from that of the Justice Department.

The Consumer Financial Protection Bureau and Office of the Comptroller of the Currency are both probing consumer-lending issues at the bank that have only recently come to light. Those inquiries are in early stages, people familiar with them said, and involve insurance products sold by the bank's auto-lending business.

The insurance issues have led Senate Democrats to call for congressional hearings, which could open up the bank and Chief Executive Timothy Sloan to renewed negative publicity. Last fall, then-CEO John Stumpf was skewered during hearings examining the sales-practices problems and abruptly retired soon after.

On another front, Wells Fargo is negotiating with the Justice Department in hope of reaching a settlement related to crisis-era sales of mortgage-backed securities. Any deal could represent a charge of more than $1 billion to the bank, according to people familiar with the talks.

Although other big U.S. and European banks have reached settlements amounting to billions of dollars, Wells Fargo has so far avoided such a hit. The issue is likely to come to the fore for the bank in the next several weeks, the people said.

A Wells Fargo spokesman said the bank has made changes to its executive leadership, business model, organizational structure and compensation system over the past year, among other areas. He said the bank continues to seek out areas of improvement and keep shareholders informed.

Investors have so far given Mr. Sloan time to clean up the problems, despite the fact the bank's shares have badly underperformed big rivals over the past year. In that span, the firm's market value has fallen by $6 billion, while Bank of America Corp.'s has risen by about $80 billion and J.P. Morgan Chase & Co.'s is up about $68 billion.

Although Mr. Sloan was finance chief during part of the time when sales issues took place, he came up through the ranks in the bank's wholesale-banking business during his 30 years at the firm. That unit hasn't been implicated in any of the scandals.

David Katz, chief investment officer of Matrix Asset Advisors Inc., said he believes the bank is turning itself around, given a comprehensive investigation that was responsible for unearthing some of the new problems facing the bank. As well, there have been changes in both management and the board.

That makes the shares attractive based on both valuation and their dividend yield, said Mr. Katz, whose firm owns 500,000 Wells Fargo shares. Plus, Wells Fargo "has a great credit portfolio and will benefit from rising interest rates."

Of greater concern to many investors is when the bank will pivot to growth and show an improvement in profit margins.

Tom Brown, whose hedge fund Second Curve Capital owns more than $1 million in Wells Fargo shares, said he so far has been "very impressed with how hands-on Tim Sloan is in identifying and rectifying the problems."

His biggest concern is whether settlements will hit the bank's growth in capital or potentially hurt increases in dividends or share repurchases. Mr. Brown added that he doesn't think the bank's sales-practices issues will be front and center a year from now.

Even the bank's largest shareholder, Warren Buffett, recently seemed unperturbed by the bevy of problems that have surfaced at the bank.

"What you find is there's never just one cockroach in the kitchen when you start looking around," the chairman and CEO of Berkshire Hathaway Inc. said on CNBC in late August. "Anytime you put focus on an organization that has hundreds of thousands of people...you may very well find that it wasn't just the one who misbehaved that you find out about."

Mr. Buffett said at the time that he's sticking with Wells Fargo for the long-term -- Berkshire owns roughly 9.4% of the bank -- and that mistakes made "are being corrected."

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

(END) Dow Jones Newswires

September 08, 2017 05:44 ET (09:44 GMT)