WFC Wells Fargo and Company

By Heather Gillers and Emily Glazer 

Some states and cities that do business with Wells Fargo & Co. continue to steer clear of the bank when selling municipal bonds to the public, the latest sign larger customers haven't forgiven its sales-practices scandal.

New York City's leaders have a prohibition on bond deals with Wells Fargo. California and Ohio both recently extended their own limitations on doing business with the bank. Chicago shunned Wells Fargo for a year and hasn't done a deal even after its ban expired.

Wells Fargo's ranking among underwriters by volume fell to eighth in this year's first quarter from third two years earlier, before the scandal, according to Thomson Reuters data.

"There's no question that the business bans that came up two years ago had an impact on our growth," said Phil Smith, head of Wells Fargo's government and institutional banking group, which includes municipal banking. But Mr. Smith said many clients are giving the bank the "go ahead to compete for business."

Underwriting municipal bonds is a small part of Wells Fargo's business, sitting within the bank's wholesale banking group. Wholesale banking makes up around half of Wells Fargo's profits. But the municipal-banking issues show the widespread impact of the sales-practices scandal, which centered on its business with retail customers.

Relationships with treasurers' offices around the country may be hard to repair.

"The court of public opinion still weighs heavily on elected officials," said Richard Ciccarone, president and chief executive of Merritt Research Services LLC, a municipal-bond research firm. When an underwriter's image is tarnished, he said "they can go into the penalty box for a period of time."

The governments steering clear of Wells Fargo once produced a stream of fees for the bank, documents show. New York City and California issue billions of dollars in bonds annually, and fees can run to as much as $2 million per deal, documents show. The lead underwriter typically receives between 35% and 65% of the fee amount, according to industry practices.

States first pulled their business soon after the bank's sales-practices scandal erupted in September 2016. The bank later said it opened as many as 3.5 million customer accounts without their knowledge or authorization. That fall, Chicago and at least four states approved temporary bans on certain business with the bank, such as underwriting and investing, according to officials and public records.

Mr. Smith said Wells Fargo has been meeting with officials in Chicago and that he hopes to win business there soon.

In March 2017, Wells Fargo received a downgrade on its Community Reinvestment Act rating. Several governments limit business with banks deemed less than "satisfactory." New York City put its ban in place in May 2017. This past February, Wells Fargo was hit with a Federal Reserve asset cap for "widespread consumer abuses."

The state and local government bans typically prohibited Wells Fargo from serving as lead underwriter and sometimes applied only to negotiated deals. Some extended to schools like the University of California and to airports including Midway and O'Hare in Chicago, public officials said.

"We still have some pockets where bans are being renewed or the worst part is, it's just hard to hire us," Mr. Smith said. "We keep competing where we can and continue to provide them with ideas." He added that the new tax law has reduced overall bond issuance.

Saving money has at times trumped public officials' qualms about Wells Fargo. The bank underwrote three bond deals in California, where laws require the use of the lowest bidder on competitive sales. Seattle continued to bank with Wells Fargo after no other firm showed interest in providing the city with depository services. Florida welcomed Wells Fargo, which repeatedly underbid competitors.

"My position on that has always been you ought to be making business decisions on economics not politics," said Florida's state bond director, Ben Watkins.

But Las Cruces, N.M., recently terminated Wells Fargo as the bank handling the city's day-to-day banking needs, ending a roughly 15-year relationship. Ken Miyagishima, the mayor of Las Cruces, said the decision to switch to U.S. Bank came after residents at two council meetings expressed concerns about the bank's practices.

"Never have I seen residents so inclined to come to a council meeting to discuss who we bank with," Mr. Miyagishima said. "This obviously was something they felt very passionate about."

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Gretchen Morgenson

contributed to this article.

Write to Heather Gillers at heather.gillers@wsj.com and Emily Glazer at emily.glazer@wsj.com

(END) Dow Jones Newswires

June 17, 2018 08:14 ET (12:14 GMT)

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