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UPDATE 1-Old problems overshadow new era at Wells Fargo

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By Dan Freed

NEW YORK Oct 13 The Tim Sloan era has begun at Wells Fargo but the old problems remain.

The newly installed chief executive faces a plethora of challenges following a sales practices scandal that felled his predecessor John Stumpf.

He needs to restore the bank's reputation after revelations that staff opened as many as two million accounts without customers' knowledge to meet internal sales goals and he has to navigate a litany of federal and state investigations arising from those revelations.

Wall Street will be his first port of call when he presents third-quarter results on Friday.

Investors are seeking reassurance that a suddenly chastened Wells Fargo can rebuild its reputation and retain profits while overhauling the hard-charging sales culture at the heart of the scandal over unauthorized accounts.

Sloan's nearly 30 years with Wells, largely spent on the corporate and institutional side of the bank, and his moderate temperament make him an experienced pair of hands.

But as chief operating officer of the bank since November 2015, he had oversight over Wells' retail division where the unauthorized accounts were created, some of them during his tenure as COO.

Such proximity will make it difficult to silence critics in Washington who are also investigating the scandal and have said it proves that some large banks should be broken up.

"I remain concerned that incoming CEO Tim Sloan is also culpable in the recent scandal, serving in a central role in the chain of command that ought to have stopped this misconduct from happening," said Maxine Waters, the top Democrat of the House Financial Services Committee, in a statement.

Wells' shares gave back the gains accrued on Wednesday in after-hours trading when Stumpf's departure was announced and were last down nearly two percent to $44.47. The stock is nearly 11 percent below the level it was trading at before the scandal broke.

CALCULATING THE TAB

Wall Street is trying to get a handle on what a long list of probes and lawsuits regarding the bank's opening of unauthorized customer accounts will ultimately cost.

So far the tab has been relatively small: Wells agreed to a $190 million settlement last month, representing less than 1 percent of its annual earnings. But that deal itself led to a range of other inquiries the San Francisco-based bank is now contending with.

Wells Fargo is expected to say how much money it has set aside for legal costs it can reasonably predict when management discusses results on Friday. At least nine separate regulators, prosecutors, enforcement agencies and congressional committees appear to be looking into the bank's actions, according to a Sept. 26 Bernstein Research report. That comes in addition to private lawsuits from shareholders, customers and former workers.

Wells' settlement on Sept. 8 with the Consumer Financial Protection Bureau, Office of the Comptroller of the Currency and a Los Angeles prosecutor revealed that the bank fired 5,300 employees for improper practices and is now working to retool risk-management protocol as well as pay incentives and training for workers.

Former employees have described a pressure-cooker sales culture inside the bank where managers had browbeat staff into hitting aggressive daily sales quotas, which in turn led some workers to create unauthorized accounts.

As government authorities examine Wells Fargo, it is likely they will find abuses in other parts of the bank beyond retail customers, said Harvey Pitt, founder of consulting firm Kalorama Partners and a former chairman of the U.S. Securities and Exchange Commission.

"The damage to customers could be much more significant," said Pitt.

Earlier this month, Reuters reported a probe by U.S. Senator David Vitter has found 10,000 small business customers were also victims of improper practices.

A Wells Fargo spokesman did not respond to requests for comment.

CUTTING FORECASTS

It is difficult to estimate the total cost of the probes and litigation Wells will face over the unauthorized accounts, analysts said. Some matters could drag on for years before being resolved, and there are a range of possible outcomes.

Even so, most analysts have cut profit forecasts for Wells Fargo, citing fallout from the scandal. The average estimate for Wells Fargo's 2017 net income is now $20.8 billion, down $300 million since Sept. 7, according to Thomson Reuters data.

State and local municipalities including Illinois, California, Seattle and Chicago have publicly cut ties with Wells. While some analysts expect other government entities to make similar moves, the impact on Wells Fargo's revenues appears immaterial at this point.

Less than 1 percent of Wells Fargo revenue comes from working with local governments, non-profit hospitals and universities, according to a presentation the bank made to investors earlier this year.

The bank has also lost some retail customers, though Wells is still opening more accounts than it is closing, senior executives said on an internal call on Monday that was reported by the Wall Street Journal.

(Additional reporting by Elizabeth Dilts.; Editing by Lauren Tara LaCapra, Meredith Mazzilli and Bernard Orr)

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