Wells Fargo: The Thrill of Being Boring

Notice the trend below? That’s right, there is no trend – except up-and-down, up-and-down. It’s a perfect picture of the volatility that comes with a big trading and investment banking operation, which JPMorgan Chase certainly has. In this case, it’s relatively successful, but highly unpredictable.

JPM Stock Chart

Now look at the trend here, and try to ignore the last 11 data points (the financial crisis and its aftermath), for Wells Fargo. Through the third quarter of 2007, it’s an almost uninterrupted line, rising ever-so-slightly each period. It’s almost boring. And that’s the point.

Sure, big companies, especially financial ones, have been known to manage their earnings, aiming to achieve such stair-step results. But more than any other big bank, Wells Fargo actually manages its business with predictable progress in mind.

WFC Stock Chart

Throw in Citigroup and Bank of America, whose results also bounce all over the place, and Wells Fargo’s unique and steady business model is even more apparent.

WFC, C, JPM, BAC Chart

And, as we see from a look at the results of Goldman Sachs and Morgan Stanley, they, too, are full of surprises rather than steady improvement.

GS, MS Chart

Wells Fargo has for more than 20 years pursued a lower-risk, higher-discipline management model than its biggest competitors, and it doesn’t apologize for being dull. “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,” CEO John G. Stumpf says in the most recent annual report. He adds: “We believe we have less exposure than any of our large bank peers to capital loss from high-risk trading, derivatives and cross-border international risk.”

That approach prompted Warren Buffett and his Berkshire Hathaway to make Well Fargo a core holding in recent years, amassing 344 million shares, or a 6.7% stake, as of last December 31.

Since the first quarter of 2009, when it seemed the banking system itself might fail, shares of the big banks, save laggard Citigroup, have all snapped back dramatically.

WFC, C, JPM, BAC Chart

So, the easy money in bank stocks has already been made. If you missed it –like most investors, afraid to plunge into a sector in chaos – perhaps it’s time to be a little choosier. Now, with a new and tougher government financial scheme in place and regulators promising to actually do their jobs, the field seems to be tilting in Wells Fargo’s favor. Its business is more focused on the consumer and small companies. It, above all other giant banks, has mastered the dull yet crucial art of cross selling to customers: Great having your checking account with us. How about that mortgage? Some insurance? Manage your retirement savings?

Most big financial companies aspire to this. Wells Fargo does it.

Wells Fargo dutifully reports each quarter the number of financial products it has sold each household it does business with: 6.06 per household as of June 30, up from 5.95 at the beginning of the year. And here’s an opportunity: Wachovia, the bank Wells bought on December 31, 2008, doubling its size, has only reached 4.88 products per household, up from 4.65 six months earlier. It’s tedious detail, the sort of thing bankers ought to be worrying about, rather than, say, leveraging up a pile of shaky mortgage securities.

Wells Fargo revenue soared after the Wachovia deal, of course.

WFC Stock Chart

But profitability, measured by return on equity, has been battered by loan losses at the combined banks.

WFC Stock Chart

So, Wells Fargo, like JPMorgan, Bank of American and Citigroup, has billions of dollars more of loan losses yet to take. And anemic demand for most kinds of consumer and business loans – the new business that can help pay for yesterday’s mistakes – isn’t helping. But once banks put the bulk of the credit losses behind them, and the economy strengthens, Wells Fargo, in all its O.C.D. glory, will be best-positioned to be the big, dull bank. That should please regulators. And it might also reward investors who choose now to focus on Wells Fargo’s distinctive management approach.



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