Wells Fargo: No Whales Here – Just a Big Bank Grinding Out Superior Returns
With JPMorgan (JPM) CEO Jamie Dimon’s once-bright halo tarnished courtesy of a whale of a bad trade – leading to a loss in excess of $2 billion -- Wells Fargo (WFC) is looking better than ever relative to the other mega-banks.
In an investor meeting late last month, Wells Fargo CFO Timothy Sloan took direct aim at JPMorgan, asserting, “We have less risk than our peers,” noting that Wells Fargo has reduced its exposure to credit default swaps by 75% compared to three years ago. And it’s not as if Wells Fargo had to undergo a major risk rehab effort. Its m.o. has always been to take the road less risky, using trades to hedge, not as profit-seeking centers.
In the 2010 annual report, CEO John Stumpf wrote: “We’re not a hedge fund disguised as a bank. We’re not a proprietary trader (which produces no customer benefit) disguised as a bank.”
Now if you’re thinking, yeah, but boring banks are boring investments, well, take a look at the five-year total return path for old-school Wells Fargo. Even before JPMorgan’s recent self-inflicted wound, Wells Fargo was standing tall.
And over the past 10 years, Wells Fargo’s 59% total return is more than double the 22% for JPMorgan. Moreover, in a decade horribilis for banks, Wells Fargo nonetheless managed to also outperform the S&P 500.
Wells Fargo also has a knack for wringing out more profits from operations than JPMorgan.
The current 1.2% return on assets is at the low end of management’s stated target range of 1.3%-1.6%.
That 12% return on equity is at the low-end of the 12%-15% range the firm expects to generate going forward (absent a big economic shock.)
Rather than outsize bets on credit default swaps and other tricks of the trading world, Wells Fargo’s business is focused on making money by doing a great job of up selling (and nickel and diming) consumers. The average Wells Fargo household currently owns 5.9 WFC products, up from 5.76 a year ago. The bank’s stated goal is to get that average up to 8 products per household. Currently 25 percent of the bank’s retail clientele has at least 8 products.
The not-exactly-sexy strategy is to ring up all sorts of fees on its core banking accounts, card operations and its growing investment management arm, while, of course, also pocketing some serious interest income from loans. In the first quarter of this year, Wells Fargo had net interest income (accounting for $1.9 billion in credit losses) of nearly $9 billion, mostly from loan interest.
The fee-income side of the business made even more money; non-interest income was $10.7 billion in the first quarter, up from $9.7 billion a year ago. While Wells Fargo took a big hit on debit-card fees thanks to new federal regulations -- overall card fee income was $654 million in the first quarter, compared to $957 million in Q1 of 2011 -- it more than made up for that fee hiccup by increasing its quarterly mortgage banking income (separate from mortgage interest income) by more than $800 million compared to a year earlier.
According to Inside Mortgage Finance, WFC originated 34% of all residential mortgages in the first quarter of this year; that’s more than the combined market share of the next seven most active originators. Interest and fee income from mortgages is likely to pick up as we’re now seeing more positive than negative housing data dumps. WFC is also making a big push in investment advisory services. Income from trust, investment and IRAs has grown 16% since 2009 to more than $11 billion in 2011.
Warren Buffett has had a chunk of Berkshire Hathaway’s (BRK.A) (BRK.B) investment portfolio riding on Wells Fargo for years. But unlike positions that he’s just been holding onto -- Washington Post (WPO) and Johnson & Johnson (JNJ), for example -- Buffet has increased his Wells Fargo stake by about one-third in the wake of the financial crisis. In this year’s first-quarter he added another 10 million shares of Wells to Berkshire’s 400 million share stake. Berkshire’s $12.7 billion stake in WFC is nearly 8% of Wells Fargo’s outstanding common stock.
Sure enough, WFC is indeed looking like a solid value play. As the chart below shows, WFC’s PE ratio is still trading in line with its historical (read: before the bubble) norm, despite a recovery in the stock price.
Meanwhile, in a move near and dear to Buffett the investor (if not Buffett the CEO capital allocator) Wells Fargo is focused on delivering a solid dividend payout. The current 2.8% dividend yield beats both the S&P 500 and the 10-year Treasury note. And after passing its most recent Fed stress test, Wells Fargo announced a 22 cent per-share dividend, bringing its CY 2012 per-share dividend payout to 44 cents, nearly as much as the entire 48 cent payout for all of 2011. Wells Fargo has also announced its intention to get its dividend payout ratio -- currently about 20% -- back to its pre-crisis norm of 30%. That’s easier to pull off when you don’t have to worry much about absorbing whale-sized trading losses.
Filed under: Company Analysis