Wells Fargo’s cross-selling drama weighs on Wall Street earnings

When Wells Fargo kicks off U.S. banks’ third-quarter earnings season on Friday, all eyes will be focused on its practice of selling more products to retail customers. Long a source of strength for a company largely insulated from Wall Street’s trading malaise, cross-selling has embroiled the San Francisco-based lender in a scandal involving the creation of as many as 2 million unauthorized accounts. Now, as most banks are expected to report an increase in fixed-income trading, the tables are turned on Wells Fargo.

“Last quarter, Brexit was topic du jour, and this quarter it moves over to Wells Fargo’s sales practices,” said Jason Goldberg, an analyst at Barclays. “Both from the perspective of if competitors are seeing any market-share shifts away from Wells Fargo as a result and any potential thoughts on the Office of the Comptroller of the Currency, which said it’s going to step up its examination of cross-sell services and incentives.”

Analysts aren’t expecting the scandal to have much impact on Wells Fargo’s earnings for the period. But in the month since the bank agreed to pay $185 million to settle claims, the average of analysts’ estimates for its 2017 adjusted earnings per share dropped by 1.3 percent to $4.14, the largest decline among the six biggest U.S. banks, on growing concern that challenges to the firm’s cross-selling practices could lead to increased litigation costs and erode revenue in consumer and wholesale banking. Mark Folk, a spokesman for Wells Fargo, declined to comment.

JPMorgan Chase and Citigroup, which also report earnings Friday, are expected to post year-over-year gains in fixed-income trading, a trend analysts estimate will be reflected when other banks provide results next week. Still, combined net income at the six biggest U.S. lenders — a group that also includes Bank of America, Goldman Sachs and Morgan Stanley — probably fell 16 percent in the third quarter from a year earlier, according to the estimates, as persistently low interest rates crimp lending margins.

The surge in fixed-income trading isn’t expected to help Wells Fargo, where trading accounted for just $614 million of the bank’s $86.1 billion in revenue last year. Wells Fargo probably earned $1.01 per share on an adjusted basis for the quarter, a 3.8 percent drop from the same period a year ago, analysts’ estimates show. Its net interest margin, the difference between a bank’s income from lending and its cost of funding, declined 2 basis points from the prior quarter to 2.84 percent, according to the average of 15 analysts’ estimates compiled by Bloomberg.

“The fundamental performance of the quarter I don’t think is going to be that relevant to how people view the stock at this stage, it’s going to be all about their legal risks,” said Eric Wasserstrom, an analyst at Guggenheim Securities. “The questions that they need to address are: How are they viewing their legal liabilities at this stage and how are they going to be accruing for them?”

Wells Fargo may face “significant fines,” Wasserstrom wrote in a Sept. 28 note to clients, estimating the U.S. Department of Justice could levy a $2 billion penalty.

The Consumer Financial Protection Bureau found that Wells Fargo employees, under pressure to meet targets to sell more products, opened deposit and credit-card accounts without customers’ permission. Since a settlement was announced Sept. 8, the fallout has widened.

The Department of Labor said it’s conducting a review, and dozens of current and former customers and employees have filed lawsuits. The Justice Department and state attorneys general offices are also investigating. Chief Executive Officer John Stumpf was vilified at two congressional hearings, where he faced calls to resign. On Sept. 27, he agreed to forgo more than $41 million in pay.

“The fear of the unknown is the biggest issue right now,” said Brian Kleinhanzl, an analyst at Keefe, Bruyette & Woods. “What does this mean to cross-sell overall? What does this mean to their sales practices overall? Does it mean this is a completely changed company? That’s what investors are grappling with. That’s what everyone is grappling with.”