In the wake of the news that Wells Fargo is paying $185 million to settle charges that it created millions of fake bank accounts for its customers, three specific questions have emerged: How could this happen? Why would a bank that been touted as “the bank that works” do something like this? And were the financial spoils from these accounts even worth the hit to Wells’ reputation? According to one research analyst, the answer to question number three is a very clear “ no.”
A Consumer Financial Protection Bureau investigation found that between 2011 and 2016, Wells Fargo employees desperate to hit sales goals opened 1,534,280 unauthorized deposit accounts — that is, opened accounts without telling the people whose names were on the accounts. Of the 1.5 million fake accounts, 85,000 accrued a total of $2 million in fees. The push to hit sales quotas didn’t end at deposit accounts, either: the CFPB said last week that it unearthed 565,443 unauthorized credit card account applications — submitted on behalf of clients, without their knowledge or permission, by Wells employees — 14,000 of which accrued $403,145 in fees.
Wells said that its own independent review uncovered $2.6 million in unauthorized fees, a sum the bank says it has already refunded to affected customers.
For a bank with a $238 billion market cap, the breach of consumer trust that has resulted from these illegal sales tactics hardly seems worth the roughly $2.6 million in fees the unauthorized accounts generated. And indeed, a new analysis from CLSA analyst Mike Mayo shows that Wells could have made just as much money off of one 0.25% interest rate hike by the Federal Reserve.
“We estimate that one 25 basis point rate hike would equate to revenue equal to 2.5 million new accounts at fully profitable Wells levels, or better than the two million new unauthorized accounts even if they were at the Wells profitability levels,” Mayo wrote Monday. “These unauthorized accounts were mostly inactive — 95% of the 2 million accounts did not have fees– which may have temporarily helped the 5,300 employees who were fired,” he added, “but it hurt results at Wells.”
“Hurt” might be in the eye of the beholder here: while Wells did agree to pay a total of $185 million in penalties — $100 million of which is going to the CFPB, the largest fine the regulatory agency has ever imposed — the fee amounts to just 3.3% of the $5.6 billion in net income the bank reported as second quarter earnings. Moreover, its stock is down 4% over the last five days of trading; compare that to Sprouts Farmers Market, which has taken a 13.8% hit over the same period because it lowered its financial guidance.
Mayo’s analysis notes that the $2.6 million in fees works out to $25 per unauthorized account with a fee, or $1 per all 2 million unauthorized accounts. Wells makes 20 times more, Mayo says, on legitimate deposit and credit card fees accrued by its 21 million households.
“For each 100 basis point rate increase, Wells’ net interest income increases by an estimated $1.7 billion given a 2- to 5% benefit to net interest income, which equates to 1.7 million new households and 10 million new accounts,” he says, if you assume an average of six accounts per household.
In other words: if Wells was so desperate to make a few extra million dollars off of its deposit accounts, it could’ve just waited for the Fed to raise interest rates. Which also means that the bank probably would have been best-served by heeding its own guidebook: “There are only three ways a company can grow. First, earn more business from your current customers. Second, attract customers from your competitors. Or third, buy another company. If you can’t do the first, what makes you think you can earn more business from your competitors’ customers or from customers you buy through acquisition?”
Source: Forbes
Posted by: The Trust Advisor
Permalink: http://thetrustadvisor.com/news/one-rate-hike-wouldve-been-more-profitable-for-wells-fargo-than-2-million-fake-accounts
