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Look at Wells Fargo's Sliding Consumer Revenue to See Scandal's Scars

James Langford

Wells Fargo's   revenue from community banking, its biggest business, slid for the fourth straight quarter as CEO Tim Sloan grappled with the fallout from a fake-accounts scandal that prompted the departure of his predecessor and a backlash against the board.

Sales in the division, which once prided itself on aggressive cross-selling, dropped 4.1% to $12.1 billion in the three months through March, the bank said in a a statement. Consumers opened 43% fewer checking accounts in February alone, the bank said, and credit-card applications declined 55% that month. 

We've accomplished a lot in the past few months, but we still have work to do," CEO Tim Sloan said on a call with investors and analysts. "We understand that nothing is more important to Wells Fargo's future than ensuring we have a culture and an operating model that works for all of our stakeholders, our customers, team members, investors and communities."

Wells Fargo dropped 3.3% to $51.35 in New York trading on Thursday, widening this year's losses to 6.8%.

Companywide, earnings of $1 a share in the first quarter topped the 97-cent average of estimates in a Bloomberg survey. Net income of $5.46 billion was little changed from the year before, while revenue of $22 billion was in line with estimates.

The San Francisco-based lender, which prided itself under former CEO John Stumpf on convincing checking account-holders to add additional services, has been working to regain customer trust after the revelation last fall that employees trying to meet ambitious sales targets opened as many as 2 million unauthorized customer accounts.

The bank admitted it had fired as many as 5,300 people for the practice over a five-year period, and former CEO John Stumpf abruptly retired after contentious questioning in two Congressional hearings. In addition to a $185 million settlement with federal and local regulators, the bank is facing criminal probes and has lost several lucrative deals with government bond-issuers.

Earlier this week, Wells Fargo's board said it would claw back an additional $75 million in incentive pay from Stumpf and ex-community banking chief Carrie L. Tolstedt, blaming both for failing to realize the seriousness of the growing problem with unauthorized customer accounts prior to the settlement.

The bogus accounts didn't raise enough red flags over a span of several years partly because of a decentralized corporate structure in which division chiefs were encouraged to run their department "like they own it," according to the board's report, compiled by law firm Shearman & Sterling.

"This company is in the midst of a multi-year re-structuring process that will impact earnings performance," Richard Bove, an analyst with Rafferty Capital Markets, said in a note to clients this week in which he argued that the board's report raises the question of whether the bank "is too big to be managed." 

The board's report, while thorough, far less critical of the company's directors than two studies issued last week by influential shareholder advisory firms. 

Institutional Shareholder Services, the most influential such firm in the U.S., recommended that investors vote against 12 of Wells Fargo's 15 directors, including the four members who oversaw the investigation.

Members of two board subcommittees "failed over a number of years" to provide sufficient risk oversight at the scandal-plagued lender, the ISS report said, and the board overall failed to implement an "effective risk management oversight process" that could have spared the bank's reputation.

A second adviser, Glass Lewis, recommended shareholders vote against just six of the nominees. Both firms carry significant weight with investors, so the reports boost the likelihood of a board shakeup even if all nominees are elected at the bank's annual meeting later this month.

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