If you follow Wells Fargo (WFC, Financial), you know by now that the bank was fined $185 million by the Los Angeles city attorney and the Office of the Comptroller of the Currency for fraudulently opening more than 2 million accounts without customers' permission in September.
A recent survey by research firm CG42 conducted from Oct. 18 through Oct. 20 sought to evaluate the consequences of the scandal.
The online survey gathered responses from 1,500 customers of the top 10 U.S. Retail Banks –Â Bank of America (BAC, Financial), JPMorgan & Chase (JPM, Financial), Wells Fargo, Citibank, SunTrust (STI, Financial), BB&T (BBT, Financial), Toronto-Dominion Bank (TD, Financial), PNC Bank, Capital One (COF, Financial) and US Bank (USB, Financial). Specifically, they took 1,000 responses from Wells Fargo customers and the remaining responses came from the other top 10 U.S. Retail Banks. The survey sought to answer the following questions:
- How much has the scandal hurt Wells Fargo’s reputation?
- How many customers might leave Wells Fargo?
- How will deposits and revenues be affected over the next 12 to 18 months?
- Which banks will most likely benefit from the fallout?
Key findings
- “Over 85% of consumers surveyed are aware of the scandal, and positive perceptions of the brand sunk from 60% before the scandal to 24% post-scandal.”
- Negative perceptions of the brand increased from 15% before the scandal to 52% after the scandal.
- “While only 3% of Wells Fargo’s customers report being affected by the scandal, a full 30% claim they are actively exploring alternatives and 14% have already made the decision to switch banks as a result of the scandal. This represents $212 billion of deposits and $8 billion of revenues at risk. Our projections indicate Wells Fargo will lose $99 billion in deposits and $4 billion in revenues over the next 12 to 18 months as a direct result of the scandal, dealing a hard blow to the bank’s finances.”
- “Community and regional banks stand to gain the most from the fallout of the scandal, with a projected $38.7 billion in gained deposits and $1.6 billion in gained revenues over the next 12 to 18 months.”
- “Compounding the issue of an eroding customer base, Wells Fargo’s ability to attract new customers has also been significantly impacted by the scandal. Prior to the scandal, 21% of prospects were very or extremely likely to consider doing business with the bank. Post-scandal, only 3% say they would do business with the bank. Similarly, before the scandal about 22% of noncustomers claimed to not be likely at all to do business with the bank. That number has more than doubled to 54% post-scandal.”
- The report’s conclusion: “The short and medium-term outlook for Wells Fargo is gloomy, and the fallout from the scandal will impact the bank’s bottom line for years to come. Other banks should be quick to take note in order to avoid similar missteps.”
Final thoughts
I had a small position in Wells Fargo. When the scandal was first announced, I heard about it on the radio. I thought it was a very big deal and wanted to sell. When I checked the stock price, I was confused that the stock didn’t move much immediately after the announcement. I waited a couple more days for more information but sold shortly after. My indecisiveness cost me a little money. My reasoning was similar to the findings of the CG42 survey. I thought that if Wells Fargo was so desperate to generate earnings that approximately 5,300 employees had to be fired over creating fake accounts then Wells Fargo’s earnings must have peaked.
The survey says that 14% of customers have already switched banks and another 30% intend to explore alternatives. I doubt the fallout will be that bad. Intention doesn’t take any effort while action does. However, for existing customers who already have their Wells Fargo accounts electronically linked to other financial institutions, logging on and transferring funds only takes a couple of clicks.
The items that this report does not address are the internal morale issues and potential regulatory fallout. One would assume that when things aren’t going well at a company, employees tend to leave and replacing them is costly. Employees are customers, too. How many of them will switch banks? And how many of them will be motivated to badmouth their former employer to friends and family?
On the regulatory front, this is the perfect issue for politicians. There’s no downside to beating up on greedy bankers who screwed over the small guy. I expect further grandstanding from legislators. For these reasons, I don’t see Wells Fargo as an attractive investment.
You can download the full CG42 report here.
Disclosure: The author does not own any stocks mentioned in this article.
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