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Categorized | Banks

Fitch warns Wells Fargo over AA rating

Posted on October 5, 2016

FILE - In this May 6, 2012, file photo, a woman enters a Wells Fargo bank in New York. When Wells Fargo CEO John Stumpf testifies before a Senate committee hearing Tuesday, Sept. 20, 2016, it won't be just his bank under fire for turning friendly branches into high-pressure sales centers. It'll be the entire industry. (AP Photo/CX Matiash, File)©AP

Fitch on Tuesday warned Wells Fargo it risks losing its coveted AA credit rating for the first time in two decades because of potential damage to its reputation and profits from the fake-account scandal.

The rating agency lowered its outlook on the bank from stable to negative, meaning there is a “heightened probability” of a downgrade over the next 12 to 18 months. It is the only one of the three big rating agencies so far to do so.

    The negative outlook from Fitch comes amid the fallout after regulators found that thousands of Wells employees created bank accounts and credit cards for customers without their knowledge, and fined it $185m.

    Wells, the most valuable bank in the world before the scandal erupted, still has one of the strongest credit ratings in the industry — testament to a hard-won image as a customer-friendly lender and dependable financial performer.

    It has a higher credit classification from Fitch than
    JPMorgan, which is graded A+, and Citigroup and Bank of America, which are rated A. Wells last had a rating lower than AA- from Fitch in 1996.

    In the latest sign of political pressure on Wells, the chairman of the Senate’s small business committee said that “thousands” of small businesses — as well as consumers — had been caught by the bank’s mispractices.

    In a letter to chief executive John Stumpf published on Tuesday, Senator David Vitter, a Louisiana Republican, called on him to provide further details on how small businesses had been affected.

    Fitch said the $185m penalty would barely dent the earnings power of the bank, which produced $5.2bn in net income in the second quarter.

    However, it pointed to 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 said the bank’s earnings prowess had been supported by its apparent success at cross-selling, and it had been “an early and strong advocate” of the practice.

    In an effort to limit damage from the scandal, Wells eliminated product sales targets in retail banking from the beginning of this month, which Fitch said “may impact the company’s revenue streams in the future”.

    It added: “While Wells Fargo emerged from the financial crisis in a much better position than similarly sized peers, Fitch believes this issue creates reputational risk given the issue and allegations are understandable to the general public, in a way that misdeeds at other banks are not.”

    Fitch believes this issue creates reputational risk given the issue and allegations are understandable to the general public, in a way that misdeeds at other banks are not

    – Fitch

    Despite the negative outlook, the rating agency also said that Wells — which holds the second-largest deposit balances in the US — had the lowest cost of funding on average among its peer group. It also pointed to the bank’s strong liquidity and benign asset quality.

    Wells declined to comment on the Fitch outlook. In response to Senator Vitter’s letter, it said: “While the vast majority of accounts in the settlement were consumer accounts, to the extent there were small business accounts included, all were previously reported in the total number of potentially impacted accounts. As stated earlier, Wells Fargo has already refunded 115,000 accounts.”

    It added: “We will be addressing the requests in the letter from Senator Vitter in a timely manner.”