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Why Analysts Have a Negative Outlook for Wells Fargo

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Jan. 6 2017, Published 8:18 p.m. ET

Cloudy outlook for Wells Fargo in 2017

In September, Wells Fargo was slapped with the largest fine ever from the Consumer Financial Protection Bureau (or CFPB). The CFPB asked Wells Fargo to pay $185 million in fines for fraudulent accounts opened by employees to meet sales targets. In an unprecedented move, Wells Fargo also stripped CEO John Stumpf’s stock awards worth $41 million and required him to step down. Tim Sloan replaced Stumpf after this scandal.

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Analysts have a “cloudy outlook” for Wells Fargo after the scam targeted the bank’s reputation. Tim Sloan and Mary Mack, head of community banking (JPM) at Wells Fargo (WFC), acknowledged that it would not be an easy task to rebuild Wells Fargo’s reputation. Several investigations, lawsuits, and fines have been announced, and there may be more to come. Several clients have pulled back business from the bank (XLF), and the financial impact could be massive. The states of California and New Jersey recently initiated investigations into Wells Fargo’s sales practices with respect to the sale of insurance policies with Prudential Financial (PRU)

Additionally, the bank’s account openings plunged 41% year-over-year in November. In an effort to rebuild customer confidence, Wells Fargo has started reporting monthly data on retail banking activity.

To make matters even worse, Wells Fargo failed the Fed’s “Living Will” test. All these factors are making it tougher for the management to rebuild its image.

Upsides from short-term favorable operating results, rate hikes, or improvements in economic conditions will likely be offset by the loss of client confidence and reputation. Further, if the bank needs to change its cross-selling practices, it would hurt its revenue growth and earnings.

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