Wells Fargo: Scandal or Success Story?

Wells Fargo is currently facing reputation damage over an FX scandal, however, the company is simultaneously set to benefit from a possible reduction in US corporate tax

 

Wells Fargo & Co. (NYSE: WFC), one of America’s leading lenders, was shaken up by yet another scandal at the beginning of the week, as the Wall Street Journal reported late on Monday that the company had systematically inflated clients foreign exchange fees, causing the banks’ legitimacy to be called into question.

 

As WSJ reported, Wells Fargo had promised some of the employees in its FX department a cash bonus directly on the revenue they generated. This apparently provided an incentive for employees to overcharge some of their corporate clients in order to inflate their own bonuses, by setting the likes of international transaction fees substantially higher. As such, an internal review explicated that only 35 of around 300 fee agreements set by the foreign-exchange operation had been charged accurately by Wells Fargo.

 

In addition to the internal audit that led to these revelations, Wells Fargo’s foreign-exchange division is currently under investigation by federal law enforcement organizations including the Federal Reserve and the U.S. Attorney’s Office for the Northern District of California. This predicament could have potentially disastrous outcomes for the company’s reputation, as similar scandals affecting the lender have not gone down well in the past. Wells Fargo stock took a significant hit last year when it emerged that it’s salespeople had systematically been opening client accounts without authorization or alternatively invented customer details, again to increase their own bonuses.

 

However, America’s third-largest bank is currently facing something of a polarized predicament, with scandal being followed by a very real chance of success. That is, the Senate inched closer to passing a bill on Tuesday that could cut corporate tax down from 35% to 20%, which constitutes excellent news for the company. This is because very few stocks would benefit as much from a tax cut as Wells Fargo, as the lender earned over 21 billion in assets over the trailing 12 months, rendering it the 4th most profitable stock on the S&P 500 index.

Wells Fargo net-income 2017. Source: The Motley Fool

Wells Fargo net-income 2017. Source: The Motley Fool

 

As such, the prospect of a cut in corporate tax was enough to drive the stock up 2% by market close on Wednesday, meaning that shares are currently valued at $56.68. So despite the FX trading scandal that the company is currently facing, the market seems to nevertheless be reacting on account of the potential upsides of a diminishing corporate tax. In this way, if investors are willing to brave the possible downsides of a bruised reputation for a while, then betting on Wells Fargo might just be the gamble that pays off.

(Kathleen Craig, Research)

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