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Wells Fargo (WFC)Stock (Financial Services Industry, Money Center Banks Industry)
 Wells Fargo & Company (WFC) is the fifth-largest of the diversified financial services firms in the United States in term of assets. In 1888, Wells Fargo became the first nationwide bank, and the company has consistently striven to remain competitive. Headquartered in San Francisco, Wells Fargo provided convenient service to its customers through its 80 businesses, 6000+ branches, and the nation's third-largest ATM network. With 158,000 employees, Wells Fargo offers a selection of financial products ranging from retail mortgages to small business loans to insurance products. Despite strong performance in recent years, Wells Fargo's net income did fall 4% in 2007 as deterioration in domestic credit markets led to higher provisions for loan losses. With more than 80 distinct businesses, Wells Fargo recognizes that its structure and size can be daunting to both customers and investors. Wells Fargo introduced the "One Wells Fargo" initiative in an effort to simplify its business model and improve customer service. No plans for consolidation in any of the businesses have been announced, however. WFC's management remains committed to offering the wide range of products and services that Wells Fargo's size supports, and the company is continuing to push opportunities to cross-sell products to customers across divisions. The average Wells Fargo customer uses between 5 and 6 of the company's various services. Wells Fargo's growth prospects for retail banking are focused on the Western region of the United States, specifically a select group of immigrants. The projected market share for Wells Fargo in this area is 3%. Western states have seen double-digit population growth, which Wells Fargo sees as an opportunity to expand to an unsaturated market. Wells Fargo has no retail banking presence in the Eastern United States and does not plan to establish any branches in this region. Another key factor in WFC's expansion plan involves immigrant groups. With immigration to the United States now at a 70-year high, Wells Fargo has begun specifically targeting these customers. Wells Fargo was the first major U.S. bank to remit (transfer) money to China and Vietnam and has since expanded its business to India, Philippines, Mexico, El Salvador, and Guatemala.
[edit] Business Model
[edit] Community BankingWells 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. The total revenue for this division increased 11% to $25.54 billion from $23 billion in 2006, reflecting strong sales and retail banking fees. Despite this, 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 its mortgage banking division saw an 18% ($505 million) increase in revenue for 2007, though this was more than offset by the larger provisions for losses stemming from mortgage defaults. [edit] Wholesale BankingWFC'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 reached a record of $2.28 billion in 2007, a 13% increase from 2006. The gain was driven primarily by an 20% increase in the average amount of its loans to customers as well as a 51% increase in its average deposits.[3] Although credit losses were much higher in 2007 than in 2006, $69 million versus only $16 million, they remained low in comparison to the gains in loan and deposit volume. Non-interest expenses rose by 16% but were offset by a 15% increase in net revenue to $8.34 billion. [edit] Wells Fargo FinancialWells 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. 2007 net income for Wells Fargo Financial fell by to $481 million, a decrease of 44% from $865 million in 2006. This decrease resulted from a combination of higher credit losses in the auto lending and credit card divisions, slowing growth in the firm's auto portfolio, and the sale of some of the division's Latin American operations. Total revenues for this division rose 2% in 2007, reaching $5.5 billion, compared with $5.4 billion in 2006. Average loans increased 13% in 2007 but were offset by higher provisions for charge-offs. 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.[4] 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 slowdownWith the slowdown the housing market from 2007 and into 2008, Wells Fargo's mortgage lending business is being hit by the slow growth, and even 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 credit card business has been experiencing a decline in purchase volume, which is depressing the overall performance of the Wells Fargo Financial division. Wells Fargo Home Mortgages has also taken a setback, with higher provisions for credit losses offsetting revenue growth in 2007. 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 avoidanceThe 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 option adjustable rate mortgages (option ARMs) entirely, a decision that insulated the company from the majority of the high default rates and large losses that other lenders are dealing with. [edit] Focus on "underbanked" immigrantsWFC'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. In addition, Wells Fargo partners with U.S. consulates and embassies in Asia and supports the Matricula Consular as identification for immigrants from Mexico to help make the financial transition to the United States easier. [edit] Exposure to US economic cyclesIts 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.[5] 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.[6]  [edit] Interest rates sensitivityThe 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 2% as of the first quarter of 2008. 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] CompetitorsWells Fargo's main competitors are Bank of America (BAC), U.S. Bancorp (USB), and Washington Mutual (WM). 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.
 
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