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Latest Wells Fargo scandal disclosure actually could be a positive, analyst says

  • New revelations that some 3.5 million accounts were affected should constitute a full disclosure of the problem, a KBW analyst says.
  • The scandal arose following an investigation into the bank's cross-selling program in which employees were pushed to sell as many products to customers as possible.

The headlines keep getting worse for Wells Fargo in its fake account scandal, but the latest disclosures actually could represent a turning point.

Revelations on Thursday that some 3.5 million accounts were affected should constitute a full disclosure of the problem and allow the beleaguered bank to begin putting the scandal behind it, Keefe, Bruyette & Woods said in a note.

"The fact that the company has completed its comprehensive third-party account review and has communicated the finality of its customer remediation plans is a positive in our view," KBW analyst Brian Kleinhanzl said in a note. "The retail sales practice scandal settlement was announced nearly a year ago, and at this stage we now expect the trickle of new information to slow considerably."

Wells Fargo shares took a hit from the announcement, falling 0.8 percent by mid-Thursday afternoon. It's been a terrible year for the third-largest U.S. bank by assets, marked by a big reputational hit that has sent shares down about 7.6 percent year to date. By comparison, the KBW Nasdaq Bank Index is off about 1.2 percent in what has been a rough year for financials overall.

However, Kleinhanzl thinks Wells Fargo can begin to repair some of the damage. He noted that the bank already had gone public that there would be a further review that would show more accounts affected.

Pedestrians pass in front of a Wells Fargo bank branch in New York.
Eric Thayer | Bloomberg | Getty Images
Pedestrians pass in front of a Wells Fargo bank branch in New York.

"As the company puts the retail sales practice scandal in the rearview mirror, then we would expect to see the year-to-date underperformance reverse — as long as no new issues arise," he said.

The scandal came to light following an investigation into the bank's cross-selling program — a practice in which employees were pushed to sell as many products to customers as possible across multiple lines. Initially, the company said some 2 million accounts were involved.

Fallout from the scandal saw the former CEO and other executives pushed out. Sen. Elizabeth Warren, D-Mass., has called for the removal of all the board members who were in place during the time in question.

The bank already has paid a $185 million fine and settled a class-action suit for $142 million. Additional refunds and compensation are expected to cost $10.7 million more, Kleinhanzl said. The payouts are not expected to have a material impact on earnings.

However, he noted that the bank still has outstanding issues regarding auto and collateral protection insurance. Previous revelations indicated that Wells had been putting some customers into auto insurance plans they didn't need. The bank has said it will refund $80 million to 570,000 affected customers.

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