Finance

Wells Fargo's fake-account scandal leads to credit downgrade

Key Points
  • Wells Fargo's troubles with its fake-account scandal have earned the bank a credit downgrade from ratings agency DBRS.
  • The move is in reaction to the growing costs the third-largest U.S. bank by assets faces regarding the scandal.
  • Wells Fargo's shares are down more than 3 percent in 2017, underperforming the broader banking sector.
Sen. Warren: WFC misdeeds all about juicing reported profits
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Sen. Warren: WFC misdeeds all about juicing reported profits

Wells Fargo's troubles with its fake-account scandal have earned the bank a credit downgrade from a ratings agency.

DBRS announced Wednesday that it is taking down the Wells rating from AA to AA (low). That's essentially a step and a half below top-rated, but still well within the range of investment-grade.

The move is in reaction to the growing costs the third-largest U.S. bank by assets faces regarding the scandal, in which customers were enrolled in programs without their consent or knowledge.

"The one-notch rating downgrade reflects operational and management missteps at the Company and resultant reputational damage stemming from ongoing issues surrounding the Company's sales practices, as well as practices impacting other consumer-related areas," DBRS said in a statement.

Wells Fargo has admitted that as many as 3.5 million accounts were involved. Employees under pressure to meet aggressive sales goals enrolled customers in multiple products. Though the practice had been ongoing for years, it only came to public light a year ago when Wells agreed to pay a $185 million settlement with various authorities.

A customer leaves an ATM at a Wells Fargo branch in Denver.
Rick Wilking | Reuters

Since then, other disclosures have arisen. The practices also extended to enrolling customers in auto insurance that they didn't need, and the bank paid a $142 million class-action settlement. It also has said it will pay $2.8 million in refunds to affected customers.

"As the Company works to address the issues, expenses have been elevated and revenue growth in some areas has softened," DBRS said. "Additionally, negative headlines are likely to remain an ongoing risk, as the Company faces heightened regulatory scrutiny, litigation, as well as additional investigations and the ongoing challenge of evolving the culture of the organization."

While DBRS said the problems place "a degree of uncertainty" over Wells, the agency said the bank otherwise looks solid. Wells is approaching its problems "from a position of strength," DBRS said.

"Despite growing expenses and a worsening efficiency ratio, the Company continues to outperform many global peers," the agency added.

Wells Fargo's position remains strong in deposit share, commercial and consumer banking and other areas of financial operations.

However, shares this year have performed poorly, down 3.2 percent year to date compared with a 4 percent gain for the KBW Nasdaq Bank Index.

Wells Fargo declined to comment.