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WFC AT A GLANCE

P/E ► 31.2 AVG EV/EBITDA ► 28.1 HIGH ROA ► 1.3% AVG ROE ► 3.7% AVG Debt to Equity ► 11.8 AVG Current Ratio ► 0   Interest Coverage Ratio ► 2.20 AVG

 

 

 

 

 

 

Revenue, Net Income, and Net MarginRevenue, Gross Profit, and Gross MarginOperating IncomeEbitIncome Before TaxesNet Income from Continuing OpsInterest vs Continuing IncomeInterest CoverageOperating Expenses

Wells Fargo & Company (WFC) became the nation's largest mortgage lender and the second-largest diversified financial services firms in the United States in term of desposits after acquiring Wachovia (WB) on December 31, 2008.^[1][2] Wells Fargo's bid to buy all of Wachovia (WB) was approved on October 12, 2008 and the company sold $12.6B in common stock and $25B in preferred stock to the US Government through Treasury Secreatary Paulson's $700B Troubled Assets Relief Program (TARP).^[3][4][5] The final deal cost WFC $11.7B and enlarged its total assets to $1.4 trillion ^[6][7]

Wells Fargo has been negatively affected by the 2007 Credit Crunch and the subsequent economic decline. The company's non interest revenue has fallen by 5% and its profits margins have also fallen from 20.45% in 2007 to 6.33% in 2008. However, these declines are similar to many other banks, and Wells Fargo has not been forced to Write down large losses on its assets.^[8] Despite this, the Standard & Poor's Rating Service downgraded Wells Fargo from its AAA rating to AA+ after its acquisition of Wachovia.^[1] However, in the first quarter of 2009, Berkshire Hathaway (BRK) manager Warren Buffett raised his stake in Wells Fargo by 12 million shares.^[9]

[edit] Business Model

Wells Fargo & Company can best be classified as a diversified financial services company. With over 80 distinct businesses, Wells Fargo offers a full range of financial products and services and targets all types of clients, from individuals to large corporations. Wells Fargo separates its businesses into three main divisions for revenue reporting purposes: Community Banking, Wholesale Banking, and Wells Fargo Financial.

[edit] Community Banking ($2.93B net income and 84.8% of 2008)

Wells Fargo's Community Banking business serves small business clients (with up to $20 million in annual sales) as well as retail customers and high-net-worth individuals. Through a variety of channels, including the company's regional banking branches, over 6,700 ATMs, website, and telephone banking service, Community Banking provides products ranging from home mortgages and debit cards to personal trusts. Community Banking also offers Wells Fargo Advantage Funds, a family of mutual funds.

WFC's Community Banking businesses earned $5.29 billion in net income in 2007, down from $5.53 billion in 2006, and it fell again in 2008 by 43% down to $2.93B. Net income declined largely as a result of higher provisions for credit losses on bad loans, which totaled $3.19 billion (as compared to $887 million in 2006). Net interest income in 2007 showed a 2% increase from the previous year. WFC is one of the largest mortgage originators in the U.S. and incurred losses stemming from mortgage defaults.^[11]

[edit] Wholesale Banking ($1.29B net income and 37.3% of 2008)

WFC's Wholesale Banking Group serves the company's business clients with annual sales exceeding $10 billion. Wholesale Banking is responsible for a line of corporate, commercial, and real estate banking products and services. Offerings include institutional investments, employee benefit trusts, investment banking, construction loans, and insurance.

Net income for Wholesale Banking fell 48% in 2008, after reaching a record of $2.28 billion in 2007. Credit losses rose again in 2008 to $1.12B, which was much higher than the $69 million and $16 million losses in 2007 and 2006 respectively.^[12]

[edit] Wells Fargo Financial (-$.764B net income and -22.1% of 2008)

Wells Fargo Financial is comprised of the company's auto finance and consumer finance operations, which consist mostly of auto, direct, and real estate loans. This division also includes WFC's credit card business. While WFC's Community Banking division primarily serves small businesses, Wells Fargo Financial caters to individual clients.

2008 net income fell to a $764 million loss, continuing the trend from 2007 of declining income. The decline was a result of a $2.38B credit loss from increased losses in the credit and auto portfolios. The auto lease industry's growth slowed down and the credit card industry had an increase in Net Charge Offs - the loans deemed uncollectible.^[13]

Wells Fargo has 7.7 million credit card accounts as of 2007, with outstanding balances totaling around $12 billion. Additionally, WFC's 20 million debit card accounts made it the #2 issuer of debit cards in the U.S.^[14] WFC earns revenue from its credit cards through a variety of means. As a credit card issuer, it charges interchange fees (charged to merchants who accept credit cards), interest on outstanding customer balances, and a variety of other fees charged to customers. Some of the most common fees are for late or missing payments, charges that exceed the card's credit limit, and monthly or annual membership fees. These revenues must be balanced against the many risks and costs that credit card issuers face. The most significant costs are interest expenses (since Wells Fargo usually borrows the money that it lends to credit card customers, it pays interest on the money that it borrows), fraud (credit card companies assume most of the costs for items charged to stolen or duplicated cards), and rewards (in order to compete with each other, banks offer cash-back rewards and bonus point systems to lure customers; these generate costs that the credit card issuer must bear).

[edit] Trends and Forces

[edit] Effects of housing market slowdown

With the slowdown the housing market from 2007 and into 2008 and 2009, Wells Fargo's mortgage lending business is being hit by the slow growth and decreases, in residential real estate prices. The economy as a whole is experiencing the "home equity effect", where homeowners perceive their house values to be lower than they anticipated, and therefore perceive themselves to be relatively less wealthy. As a result, consumers spend and consume less, which has negative repercussions for many of Wells Fargo's businesses. The number of total housing starts has fallen by 63% of their peak levels during the end of the housing boom.^[15] During the last 3 months of 2008, the nation's banks recorded a total of $26.2B in losses and faced a weighted average of 94% fall in profits.^[16] Wells Fargo Home Mortgages have taken a setback, with higher provisions for credit losses offsetting revenue growth in 2008. However, Wells Fargo has been dealing with the mortgage setbacks better than have many of its competitors, most likely due to WFC's extreme diversification in product offerings, which allows the company to compensate for poor performance in the home mortgage business.

[edit] Subprime bust avoidance

The housing slowdown is often attributed to the collapse of the subprime lending market. Subprime lending, or lending money to "riskier" customers, can lead to higher loan losses in harsher economic climates, or during periods of stagnant or falling housing prices. As customers find themselves unable to make their debt payments, which are higher than average to begin with, defaults rise.

Wells Fargo has fared better than most competitors in the mortgage business, mostly because WFC's mortgages are predominately prime and near-prime and have not experienced the higher rates of default seen in the subprime market. Wells Fargo has avoided much of these losses by deciding not to extend or purchase option adjustable rate mortgages (option ARMs). However, Wachovia, which was acquired by Wells Fargo, took part in Option ARMs and subprime lending. Wachovia has $122B in outstanding risky loans and a loan loss of 29% or $36B is expected.^[17] yet, the change economic situation has made existing models unreliable and it is largely unknown what the default rates will be on Wachovia's assets.

[edit] Exposure to U.S. Economic Cycles

Its heavy concentration in the U.S. makes Wells Fargo more dependent on U.S. economic conditions than some of its more internationally diverse peers. Global gross domestic product increased by an estimated 4.9% over the course of 2007, though the U.S. GDP growth rate was notably lower.^[18] As the world economy continues to expand, consumers and firms have more wealth to spend and invest, which translates into increased revenue for Wells Fargo. In 2008, the International Monetary Fund (IMF) expects relatively poor conditions in the U.S. economy to put a drag on global GDP growth, which would mean lower revenues for financial services firms like Wells Fargo.^[19]

U.S. interest rates over time

[edit] Interest Rates Sensitivity

The Federal Reserve increased the federal funds rate from 4.25% to 5.25% early in 2006, which put upward pressure on interest rates. This had the effect of slowing economic growth and lowering inflation, which partially offset the effects of strong economic expansion (discussed above). Higher interest rates tend to discourage consumer spending and investment, which impacts Wells Fargo in the form of lower balances charged to credit cards, fewer loans and deposits, and reduced business loans. At the same time, higher general interest rates allow WFC to charge its customers higher interest on their loans, which could increase the company's revenue from the loans that customers do take out.

In late 2007 and early 2008, the Fed implemented a series of interest rate cuts, reducing the rate from 5.25% in September of 2007 to 0-.25% in December 2008.^[20] These measures were largely aimed at stimulating economic activity in the face of a potential recession caused by fallout in the subprime lending industry. Wells Fargo will benefit from these cuts if they have the desired effect of stimulating consumer spending and encouraging businesses to expand.

[edit] Focus on "underbanked" immigrants

WFC's expansion program in recent years has focused on the immigrant demographic, a traditionally "underbanked" group. With immigration to the United States currently at a 70-year high, Wells Fargo has begun specifically targeting minority customers by making their services more useful to those with relatives living overseas and accessible in languages other than English. Wells Fargo was the first major U.S. bank to remit (transfer) money to China and Vietnam and has expanded its business to include India, the Philippines, Mexico, El Salvador, and Guatemala. Wells Fargo's ATM machines offer service in Spanish as well as English. Wells Fargo began a program that extends credit cards to Spanish-speaking immigrants who may not have social security cards. Although this has generated criticism that the bank is endorsing illegal immigration, WFC claims that it provides credit to many without a solid history.^[21]

[edit] Competitors

Wells Fargo's main competitors are Bank of America (BAC) and U.S. Bancorp (USB). In terms of revenue and net income, Wells Fargo is second to Bank of America. Wells Fargo has, however, enjoyed higher growth rates than Bank of America, reflecting its potential for continued expansion.

Wells Fargo's lack of international exposure contrasts with top competitor Bank of America. Although WFC holds assets overseas, its interest in foreign markets does not extend to opening branch offices outside the United States. While this does allow Wells Fargo to focus its resources on gaining greater market share in the U.S., it does make WFC more vulnerable to the U.S. economic cycles, with no foreign markets to buffer domestic performance.

Wells Fargo was originally ranked fourth in market share of total domestic deposits, behind Bank of America (BAC), J P Morgan Chase (JPM), and Wachovia (WB). However, after the acquisition of Wachovia, the bank became the second largest and surpassed JPMorgan.

WFC has a low loans to deposit ratio, though not the lowest in the industry

Wells Fargo has the highest net interest margin (NIM)

[edit] References

1. ↑ ^{1.0 1.1} Trading Markets "Wells Fargo and Wachovia Merger Completed" 1 January 2009
2. ↑ Forbes "Bank of America drops Countrywide name" 27 April 2009
3. ↑ Wachovia Chooses Wells Fargo, Spurns Citi - WSJ.com
4. ↑ Board of Governors of the Federal Reserve System "Press Release" 12 Oct 2008
5. ↑ Forbes: Business Finance "UPDATE 3-Wells Fargo to raise $10 bln to fund Wachovia deal" 5 Nov 2008
6. ↑ Fox Business News "Fed Approves Wells Fargo's Wachovia Acquisition" 13 Oct 2008
7. ↑ Reuters "Wells Fargo completes Wachovia purchase" 1 Jan 2009
8. ↑ ^{8.0 8.1 8.2} WFC 10-K 2008 Consolidate Financial Data p.37
9. ↑ Buffett lifted Berkshire stake in Wells Fargo. Alistair Barr. MarketWatch.
10. ↑ WFC 8-K 1Q 2009 "Five Quarter Summary Financial Data" p 17
11. ↑ WFC 10-K 2008 "Community Banking's" p.52
12. ↑ WFC 10-K 2008 "Wholesale Banking's" p.52
13. ↑ WFC 10-K 2008 "Wells Fargo Financial" p.52
14. ↑ Wells Fargo Today
15. ↑ Housing Economics "Housing Starts State & Metro Forecasts for 2008-2009"
16. ↑ Star Tribune "FDIC says US banks posted $26.2 billion loss at end of 2008, first quarterly loss since 1990" 26 Feb 2009
17. ↑ Mortgage Statistics "Wells Fargo/Wachovia Option Arms" 28 Dec 2009
18. ↑ IMF World Economic Outlook (WEO) - Housing and the Business Cycle, April 2008
19. ↑ IMF says 2008 global GDP growth to slow to 4.1% on U.S. downturn
20. ↑ Federal Reserve Board "Open Market Operations" 16 Dec 2008
21. ↑ Los Angeles Times "Banking on Illegal Immigrants" 14 Feb 2009
22. ↑ BAC 10-K 2008 Consolidated Financial Statements p.102
23. ↑ USB 10-K 2008 Consolidate Financial Statements p.2
24. ↑ FDIC Quarterly 2008, Volume 2, No. 4 "Highlights from the 2008 Summary of Deposits Data"
25. ↑ FDIC "Summary of Deposits" June 2008