Fitch, the credit rating agency, on Tuesday (Oct. 4) affirmed Wells Fargo’s ratings at “AA-/F1+” and Wells Fargo Bank, N.A.’s ratings at “AA/F1+” but revised the rating outlook to Negative from Stable.
In an announcement, Fitch said the affirmation reflects the company’s “superior earnings profile, strong liquidity and still benign asset quality,” while the outlook revision “reflects potential damage to the firm’s franchise and earnings profile following recent regulatory actions regarding improper unauthorized account openings.”
“The recent $185 million fine levied on WFC for improper sales practices dating back to 2011 was fully accrued for and represents just a fraction of WFC’s quarterly earnings of approximately $5.5 billion,” Fitch wrote. “Customer damages appear limited, with $2.6 million refunded and with WFC earmarking up to $5 million to cover this and any additional required customer remediation. However, Fitch views the ensuing reputational damage, risk oversight failures, impact to its selling practices and the resulting effect on earnings as much larger issues than the actual fine.”
Fitch noted that, while the issue is not new, as it was first reported by the media in 2013 and the Los Angeles city attorney filed suit in May 2015, the breadth of the issue is surprising to Fitch. “The Consumer Financial Protection Bureau’s Consent Order disclosed that WFC opened up more than 1.5 million deposit accounts and over 500,000 credit card accounts that may not have been authorized. Further, this appears to be a significant breakdown in what Fitch has long viewed as a solid risk management infrastructure,” it said. Fitch went on to note the fake account scandal creates a risk to Wells Fargo’s reputation given the issue and allegations are easily understandable to the general public in a way that bad behavior by other banks is not.
Last month, the Consumer Financial Protection Bureau announced Wells Fargo agreed to pay a $185 million fine and refund $5 million in fees that the bank wrongly charged customers. According to an investigation by the CFPB, Wells Fargo employees not only made fake deposit accounts but also submitted 565,443 unauthorized credit card account applications on behalf of unknowing customers. It’s estimated that 14,000 of those accounts accrued $403,145 in fees. Through its own independent investigation, the bank discovered a total of $2.6 million in unauthorized fees.