Finance

Michael P. Regan is a Bloomberg Gadfly columnist covering equities and financial services. He has covered stocks for Bloomberg News as a columnist and editor since 2007. He previously worked for the Associated Press.

How bad has the fallout from the fake-account scandal been for Wells Fargo's business so far?

Well, there wasn't exactly a run on the bank. Average deposits in the retail part of the bank for the third quarter actually inched up 0.6 percent from the second quarter to $708 billion. Average deposits for the entire bank were $1.3 trillion, up 2 percent from the previous quarter.

Month of Down Days
Investors have punished Wells Fargo stock since the fake-account scandal broke
Source: Bloomberg

The fourth-quarter results will give a better read on the potential damage. News of the scandal broke on Sept. 8, and the backlash built slowly during the month and didn't quite reach a boiling point until the quarter was almost over. John Stumpf, the chief executive officer and chairman who retired ingloriously on Wednesday, did not face his well-publicized browbeating from the Senate until Sept. 20. The tongue-lashing from the House and the shunning of the bank by California and Illinois didn't happen until even later.  

Still, some alarming signs of damage emerged in the third-quarter report. The bank provided a look at trends to isolate September, and it showed a noticeable impact from the scandal: Customer visits with branch bankers were down significantly, as were checking-account openings and credit-card applications:

September to Remember
Wells Fargo noted declines in several growth metrics in the last month of the quarter
Source: Wells Fargo

Understandably, the cloudy outlook made it hard for investors to get too excited for the shares even though the bank joined rivals JPMorgan Chase and Citigroup in posting revenue and earnings per share that beat analysts' estimates. After perking up in early trading, Wells Fargo's stock was poised for a fourth consecutive daily decline.

bank-earnings-101316

The $185 million settlement the bank reached with regulators last month is obviously just the beginning of its costs. The bill will undoubtedly rise as the bank shells out for fines and more settlements, reparations for customers and former employees and an increase in compliance costs.

It's still too early to gauge how much all of these costs -- plus the reputational damage and the shift away from an aggressive sales culture -- will diminish the bank's bottom line. 

"We're prepared for things to get worse before they get better," new CEO Tim Sloan said on the conference call.

Fair enough. That's a tough thing to admit to investors, so kudos to Sloan for acknowledging it. 

But how much worse it gets may depend largely on how Sloan handles the difficult task of addressing the toxic elements of the bank's culture that fostered the scandal and showing that Wells Fargo has purged itself of them.  

A large component will be public relations. To meet that challenge, Sloan needs to demonstrate he's not Stumpf. He should not emulate the mild-mannered Midwestern persona that worked so well for Stumpf for all those years, before the stoic demeanor came off as detached at best and clueless at worst when he went to Washington.

Sloan needs to show the public that he's mad as hell at what happened and that he's grabbing the bank by the lapels and slapping it in the face. Now's not the time to praise the dedication Stumpf had to the bank, as Sloan did on the conference call. Now is the time to show he's shaking things up. Or else the question of why an outsider wasn't brought in to run the bank will never go away.

Sloan has promised an investor day next year and other "enhanced disclosure" to keep analysts happy. He will also most likely need to serve up some "enhanced contrition" to customers and lawmakers. Wells Fargo better hope it lands on the right formula, otherwise those negative customer numbers could go from a blip to a downward spiral. 

-- Rani Molla assisted with charts

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Michael P. Regan in New York at mregan12@bloomberg.net

To contact the editor responsible for this story:
Daniel Niemi at dniemi1@bloomberg.net