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  1. Banking
  2. Banks

Wells Fargo's Scandal Exposes the Real Crisis Brewing Among Banks

By:
Paul J. Lim
3 min read
- Charles Mostoller—Reuters
Charles Mostoller—Reuters

Wells Fargo , whose long-time CEO John Stumpf resigned this week, reported a slight drop in profits in the recently ended quarter, as the giant bank is now being forced to start covering legal costs associated with its sales scandal.

But more than flagging profits, it was the drive for revenues that lay at the heart of this scandal, in which employees, pressured to meet aggressive targets set by Wells executives, opened credit card and bank accounts in their customers' names without their approval.

In its financial report released Friday morning, Wells indicated that its overall sales grew just 2% compared with the same quarter a year ago.

The lack of strong revenue growth has been a problem plaguing the mega bank for a while. Last year, Wells reported total revenues of $86 billion. That may sound great, but that was exactly the same amount of sales Wells Fargo reported in 2012.

The dearth of revenue growth is a problem the entire banking industry is having to grapple with, as slow economic growth, coupled with uncertainty caused by years of near-zero interest rates, has stunted the financial sector.

For the full year, financial sector revenues are expected to grow a below-average 1.4%, according to FactSet. By comparison, the healthcare sector is enjoying sales growth of 8.2%, real estate revenues are growing 7.7%, and telecom revenues are growing more than 5%.

And while financial revenue growth is expected to improve to 3.7% next year, that pales in comparison to the 6% sales growth that companies in the S&P 500 index are forecast to see.

Thus far, big banks have been able to mask this problem by cutting costs to eke out decent profits. Indeed, despite anemic sales growth, financial sector profits are on track to rise more than 6% in 2016.

But banking execs know that you can only cut your way to profits for so long. Eventually, you have to grow your book of business to assure earnings growth down the road.

And that's why banks like Wells Fargo felt the need to be so aggressive with sales goals.

Wells is hardly alone. Several other banks have been accused of using high-pressure tactics to motivate employees to sell more aggressively.

For its part, Wells insists that it has "eliminated product sales goals for retail banking team members as of October 1, 2016."

But if the economy shows signs of weakening, the pressure to sell aggressively will only get worse.

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