WFC - Wells Fargo

[muscleman]

It might not have helped their earnings substantially, but it gave Stumpf another data point to make it seem like they had high customer satisfaction. I'm not sure, but I think he even mentioned that a lot of their new accounts were from existing customers in his letter this year.

 

It didn't effect deposit growth at all, which is the ultimate data point on customer satisfaction.  If customers were dissatisfied, they would be taking their deposits elsewhere.

 

 

Just an anecdote. I am applying for a mortgage and Wells' rate is really good, so I chose it. Almost right before closing, I was told that in order to get this kind of low rate, I have to open a checking account and pay the mortgage monthly from that account. I have no choice but to do so.

 

This is how the deposit moves there.

>:(

 

[cmlber]

It might not have helped their earnings substantially, but it gave Stumpf another data point to make it seem like they had high customer satisfaction. I'm not sure, but I think he even mentioned that a lot of their new accounts were from existing customers in his letter this year.

 

It didn't effect deposit growth at all, which is the ultimate data point on customer satisfaction.  If customers were dissatisfied, they would be taking their deposits elsewhere.

 

 

Just an anecdote. I am applying for a mortgage and Wells' rate is really good, so I chose it. Almost right before closing, I was told that in order to get this kind of low rate, I have to open a checking account and pay the mortgage monthly from that account. I have no choice but to do so.

 

This is how the deposit moves there.

>:(

 

This isn't unique to WFC, JPM did the exact same thing to me. 

[TheAiGuy]

Obloquy asside, WFC is a pretty safe ±7%/year at $50 a share. There is probably a reasonable 10-15% to make on this over the next year or so, if that's your thing (it's not mine, btw).

 

Edit:

assumptions: incremental ROA ~1%, constant leverage ratio, asset growth ~3.5-4%, payout ratio 75%, leads to dividend growth of ~3.75% --> @$50, with constant p/e, E[Returns] ~= 6.8%, which is also 15year historical return.

[cmlber]

Obloquy asside, WFC is a pretty safe ±7%/year at $50 a share. There is probably a reasonable 10-15% to make on this over the next year or so, if that's your thing (it's not mine, btw).

 

Edit:

assumptions: incremental ROA ~1%, constant leverage ratio, asset growth ~3.5-4%, payout ratio 75%, leads to dividend growth of ~3.75% --> @$50, with constant p/e, E[Returns] ~= 6.8%, which is also 15year historical return.

 

Not sure how you get to a 6.8% expected return at $50 (or why you're estimating returns at $50 when the stock is $45).  By my estimates they'll earn about $4.25/share this year.  So with no growth at all that should be an 8.5% annual return buying at $50/share.

 

You're using an incremental ROA of 1%, when 2014/2015 ROA's were 1.45%/1.31% and the incremental ROA is substantially higher than the firm wide ROA since the branch network and almost all the operating costs of the branches are fixed.  You're also assuming 3.5-4% asset growth when deposits have been growing 7%/year.

 

Your analysis also assumes interest rates never rise.

[johnny]

LOL, just for the added data point. I decided to check out my mother's relationship with Wells (she's super unsophisticated). They were table to talk her into creating new checking accounts for different travel destinations, explaining to her that by having separate accounts it limited her financial exposure if her account information became compromised (kind of true! good job, bankers).

 

Morality aside, it is really unbelievable that Wells didn't at the most basic level have something in place to recognize that turning a PMA customer with 1 checking account into a PMA customer with 3 checking accounts doesn't actually create much value for the company. Everybody involved in the design of this system deserves to be fired for basic incompetence.

[Munger_Disciple]

A Wells Fargo guy at my local branch in southern cal also tried to sell me a travel checking account with the same BS when I went in to make a deposit. After a month or two, they will start charging monthly fees for the "travel" account. Naturally I declined the "travel" checking account. I think the reason WFC tries this bull s**t  is that some people will open a new checking "travel" account and put small amount of money in it. Since it is below the minimum required for no account fees, WFC gets to charge monthly fees on the new account of the customer who does not pay monthly fees on his "regular" checking account which may have bigger balances. It is very clear to me that the cross-selling reached its limit at Wells Fargo. Now they are pushing useless and unethical products to customers. You would think Stumpf & senior management would be more cautious than this behavior in the post-2008 financial crisis environment.

 

I do most of my personal banking with a credit union and am happier with them.

[Uccmal]

LOL, just for the added data point. I decided to check out my mother's relationship with Wells (she's super unsophisticated). They were table to talk her into creating new checking accounts for different travel destinations, explaining to her that by having separate accounts it limited her financial exposure if her account information became compromised (kind of true! good job, bankers).

 

Morality aside, it is really unbelievable that Wells didn't at the most basic level have something in place to recognize that turning a PMA customer with 1 checking account into a PMA customer with 3 checking accounts doesn't actually create much value for the company. Everybody involved in the design of this system deserves to be fired for basic incompetence.

 

Funny story.  The incompetence of large bureaucracies in action.  No one at the top of any of these banks deserves those paycheques there getting.  Its like winning the lottery via politics. 

 

[Uccmal]

Obloquy asside, WFC is a pretty safe ±7%/year at $50 a share. There is probably a reasonable 10-15% to make on this over the next year or so, if that's your thing (it's not mine, btw).

 

Edit:

assumptions: incremental ROA ~1%, constant leverage ratio, asset growth ~3.5-4%, payout ratio 75%, leads to dividend growth of ~3.75% --> @$50, with constant p/e, E[Returns] ~= 6.8%, which is also 15year historical return.

 

You all may get it cheaper in the near future.  Its not cheap enough for me, yet. 

 

Not sure how you get to a 6.8% expected return at $50 (or why you're estimating returns at $50 when the stock is $45).  By my estimates they'll earn about $4.25/share this year.  So with no growth at all that should be an 8.5% annual return buying at $50/share.

 

You're using an incremental ROA of 1%, when 2014/2015 ROA's were 1.45%/1.31% and the incremental ROA is substantially higher than the firm wide ROA since the branch network and almost all the operating costs of the branches are fixed.  You're also assuming 3.5-4% asset growth when deposits have been growing 7%/year.

 

Your analysis also assumes interest rates never rise.

[TheAiGuy]

Obloquy asside, WFC is a pretty safe ±7%/year at $50 a share. There is probably a reasonable 10-15% to make on this over the next year or so, if that's your thing (it's not mine, btw).

 

Edit:

assumptions: incremental ROA ~1%, constant leverage ratio, asset growth ~3.5-4%, payout ratio 75%, leads to dividend growth of ~3.75% --> @$50, with constant p/e, E[Returns] ~= 6.8%, which is also 15year historical return.

 

Not sure how you get to a 6.8% expected return at $50 (or why you're estimating returns at $50 when the stock is $45).  By my estimates they'll earn about $4.25/share this year.  So with no growth at all that should be an 8.5% annual return buying at $50/share.

 

You're using an incremental ROA of 1%, when 2014/2015 ROA's were 1.45%/1.31% and the incremental ROA is substantially higher than the firm wide ROA since the branch network and almost all the operating costs of the branches are fixed.  You're also assuming 3.5-4% asset growth when deposits have been growing 7%/year.

 

Your analysis also assumes interest rates never rise.

 

Yeah, it's meant to be a conservative estimate of value.  I'm fine if it's overly conservative. I think I would argue that this is a very stable business and that for such a business, the ~7% return I get with conservative assumptions should be very appealing to large institutional investors, and hence I would expect the stock to go back to where it was before this news came out. Which kinda feels like an arbitrage to me of around 10-15%.

 

(I would push back on of what you are saying is that an 8.5% earnings yield with no growth would translate into an 8.5% return -- I would assume that it would be worse, as I would expect the bank from being prevented on paying out 100% of its earnings through dividends or repurchases for regulatory concerns, and hence, without growth (i.e. a non-zero ROIC on retained capital), the returns are necessarily worse. But, I largely agree and I think less conservative but still quite reasonable assumptions get to expect something better. Personally, I would expect low double digits returns until the earnings multiple goes to the 12-13x range, followed by high single digits returns beyond that).

 

 

[TheAiGuy]

Obloquy asside (...)

 

aside*

[cmlber]

(I would push back on of what you are saying is that an 8.5% earnings yield with no growth would translate into an 8.5% return -- I would assume that it would be worse, as I would expect the bank from being prevented on paying out 100% of its earnings through dividends or repurchases for regulatory concerns, and hence, without growth (i.e. a non-zero ROIC on retained capital), the returns are necessarily worse.

 

I don't think that's correct.  "No growth" assumes no growth in assets.  If you assume growing assets but constant net income, then yes, the 8.5% return would be overstating actual returns.  But as long as there is no growth in assets and no growth in net income, regulators would have no reason to prevent 100% of earnings from being distributed, otherwise Wells Fargo would have an ever increasing Tier 1 Equity Ratio when it is already capitalized well above the minimums.

[shalab]

FWIW, I opened an account today with WFC - it was a busy day and there were others opening accounts as well. I asked the banker about the scandal - he said they are trained not to do certain things and the press has blown it way out of proportion. He said he was using his savings to buy WFC stock as it is a good value now. He expects the stock to be back up in two-three quarters.

 

 

Obloquy asside, WFC is a pretty safe ±7%/year at $50 a share. There is probably a reasonable 10-15% to make on this over the next year or so, if that's your thing (it's not mine, btw).

 

Edit:

assumptions: incremental ROA ~1%, constant leverage ratio, asset growth ~3.5-4%, payout ratio 75%, leads to dividend growth of ~3.75% --> @$50, with constant p/e, E[Returns] ~= 6.8%, which is also 15year historical return.

 

Not sure how you get to a 6.8% expected return at $50 (or why you're estimating returns at $50 when the stock is $45).  By my estimates they'll earn about $4.25/share this year.  So with no growth at all that should be an 8.5% annual return buying at $50/share.

 

You're using an incremental ROA of 1%, when 2014/2015 ROA's were 1.45%/1.31% and the incremental ROA is substantially higher than the firm wide ROA since the branch network and almost all the operating costs of the branches are fixed.  You're also assuming 3.5-4% asset growth when deposits have been growing 7%/year.

 

Your analysis also assumes interest rates never rise.

 

Yeah, it's meant to be a conservative estimate of value.  I'm fine if it's overly conservative. I think I would argue that this is a very stable business and that for such a business, the ~7% return I get with conservative assumptions should be very appealing to large institutional investors, and hence I would expect the stock to go back to where it was before this news came out. Which kinda feels like an arbitrage to me of around 10-15%.

 

(I would push back on of what you are saying is that an 8.5% earnings yield with no growth would translate into an 8.5% return -- I would assume that it would be worse, as I would expect the bank from being prevented on paying out 100% of its earnings through dividends or repurchases for regulatory concerns, and hence, without growth (i.e. a non-zero ROIC on retained capital), the returns are necessarily worse. But, I largely agree and I think less conservative but still quite reasonable assumptions get to expect something better. Personally, I would expect low double digits returns until the earnings multiple goes to the 12-13x range, followed by high single digits returns beyond that).

[Palantir]

Wells Fargo's pressure-cooker sales culture comes at a cost

http://www.latimes.com/business/la-fi-wells-fargo-sale-pressure-20131222-story.html

One former branch manager who worked in the Pacific Northwest described her dismay at discovering that employees had talked a homeless woman into opening six checking and savings accounts with fees totaling $39 a month.

 

 

Stay classy

 

[TheAiGuy]

(I would push back on of what you are saying is that an 8.5% earnings yield with no growth would translate into an 8.5% return -- I would assume that it would be worse, as I would expect the bank from being prevented on paying out 100% of its earnings through dividends or repurchases for regulatory concerns, and hence, without growth (i.e. a non-zero ROIC on retained capital), the returns are necessarily worse.

 

I don't think that's correct.  "No growth" assumes no growth in assets.  If you assume growing assets but constant net income, then yes, the 8.5% return would be overstating actual returns.  But as long as there is no growth in assets and no growth in net income, regulators would have no reason to prevent 100% of earnings from being distributed, otherwise Wells Fargo would have an ever increasing Tier 1 Equity Ratio when it is already capitalized well above the minimums.

 

Yeah, I think you are  right. I guess that implies, though, that the payout ratio  for any of the  SIFI's is necessairly going to be a function of their asset growth going forward. which makes sense but I hadn't considered that before.

[muscleman]

Wells Fargo's pressure-cooker sales culture comes at a cost

http://www.latimes.com/business/la-fi-wells-fargo-sale-pressure-20131222-story.html

One former branch manager who worked in the Pacific Northwest described her dismay at discovering that employees had talked a homeless woman into opening six checking and savings accounts with fees totaling $39 a month.

 

 

Stay classy

 

 

What a similarity between Wells Fargo and Amazon!

http://www.latimes.com/opinion/topoftheticket/la-na-tt-amazon-brutal-workplace-20150818-story.html

 

I was working in Amazon in that period and Jeff Bezos wrote a letter to all employees claiming that the reporter described a company that he is not familiar with. We were all like, "oh, come on, you liar!"

 

But you know what........ The stock price kept going up. Amazon is doing better each year, sucking more blood from employees and suppliers.

 

 

 

 

 

 

 

 

[cmlber]

(I would push back on of what you are saying is that an 8.5% earnings yield with no growth would translate into an 8.5% return -- I would assume that it would be worse, as I would expect the bank from being prevented on paying out 100% of its earnings through dividends or repurchases for regulatory concerns, and hence, without growth (i.e. a non-zero ROIC on retained capital), the returns are necessarily worse.

 

I don't think that's correct.  "No growth" assumes no growth in assets.  If you assume growing assets but constant net income, then yes, the 8.5% return would be overstating actual returns.  But as long as there is no growth in assets and no growth in net income, regulators would have no reason to prevent 100% of earnings from being distributed, otherwise Wells Fargo would have an ever increasing Tier 1 Equity Ratio when it is already capitalized well above the minimums.

 

Yeah, I think you are  right. I guess that implies, though, that the payout ratio  for any of the  SIFI's is necessairly going to be a function of their asset growth going forward. which makes sense but I hadn't considered that before.

 

Yes, that's right.  It's not a coincidence that WFCs target payout ratio is 65%. 

 

$1.25 trillion in deposits growing 6-7%/year is $75-85 billion/year in new deposits.  To maintain 10% equity ratio they need to retain $7.5-8.5 billion of earnings per year.  They earn $21-22 billion/year.  8/22 = 36% retention ratio, or 64% payout ratio.

 

If growth slowed the payout ratio should go up.  But we should hope growth accelerates and the payout ratio goes down.  Each dollar retained is earning an incremental 20% on capital.  $100 of deposits earns $2.95/year at the current NIM over $10 of retained equity is almost 30% pre tax returns on incremental capital.

[Guest Schwab711]

The warrants look interesting at these prices. Book value should be in the neighborhood of $41 at the time of expiration (assuming flat earnings over the next 2 years).

[Munger_Disciple]

Chief Risk Officer for retail bank takes "leave":

 

http://www.bloomberg.com/news/articles/2016-09-19/wells-fargo-s-chief-risk-officer-for-retail-bank-takes-leave

[ValueMaven]

I bought some WFC common Thursday and Friday of last week. 

 

Sincerely,

ValueMaven - NYC

[stahleyp]

I really hope Buffett talks about this. If not, do much for the whole "lose s shred of integrity and I'll be ruthless" talk.

[Spekulatius]

I really hope Buffett talks about this. If not, do much for the whole "lose s shred of integrity and I'll be ruthless" talk.

 

WFC lost of whole lot of credibility for a shred of money.

[DTEJD1997]

Hey all:

 

Anybody buying into WFC at this point in time is probably making a HUGE mistake.

 

I am going to predict that there is going to be fallout, a LOT of fallout from this latest round of scams.

 

A). The bank's credibility is damaged, perhaps severely.

 

B). They are going to have pay a big government fine.

 

C). I suspect they will be vulnerable to suits from people who got ripped off.

 

They are going to have pay out a lot on this...

[cmlber]

I really hope Buffett talks about this. If not, do much for the whole "lose s shred of integrity and I'll be ruthless" talk.

 

I would be very surprised if Buffett said anything about this for a while.  I'm sure his preference is for this news to keep the stock price down so WFC buys back more stock.  No reason to come out and say this isn't a big deal.

 

There is a HUGE difference between this and the "lose a shred of integrity" situation.  Here's a summary of what was going on in the Salomon case:

 

"At the center of this experience was a single day—what he has called “the most important day of my life,” Sunday, Aug. 18, 1991—in which the U.S. Treasury first banned Salomon from bidding in government securities auctions and then, because of Buffett‘s efforts, rescinded the ban. In the four hours of suspense between the two actions, Buffett struggled passionately to ward off a tragedy he saw threatening to unfold. In Buffett‘s opinion, the ban put Salomon, this company now being priced at $9 billion, in sure danger of having immediately to file for bankruptcy."

 

In this case they charged people $2 million that they shouldn't have.  Their revenue over that period was about 200,000x greater than the fraud.  Quite different from a concern of "having immediately to file for bankruptcy." 

 

When you employ 265,000 people, sometimes some of them do dumb things.  If you look at any company this large I would bet you can find instances where consumers as a whole suffered $2 million or more in damages because of the acts of a few dumb employees.

 

[Green King]

I really hope Buffett talks about this. If not, do much for the whole "lose s shred of integrity and I'll be ruthless" talk.

 

I would be very surprised if Buffett said anything about this for a while.  I'm sure his preference is for this news to keep the stock price down so WFC buys back more stock.  No reason to come out and say this isn't a big deal.

 

There is a HUGE difference between this and the "lose a shred of integrity" situation.  Here's a summary of what was going on in the Salomon case:

 

"At the center of this experience was a single day—what he has called “the most important day of my life,” Sunday, Aug. 18, 1991—in which the U.S. Treasury first banned Salomon from bidding in government securities auctions and then, because of Buffett‘s efforts, rescinded the ban. In the four hours of suspense between the two actions, Buffett struggled passionately to ward off a tragedy he saw threatening to unfold. In Buffett‘s opinion, the ban put Salomon, this company now being priced at $9 billion, in sure danger of having immediately to file for bankruptcy."

 

In this case they charged people $2 million that they shouldn't have.  Their revenue over that period was about 200,000x greater than the fraud.  Quite different from a concern of "having immediately to file for bankruptcy." 

 

When you employ 265,000 people, sometimes some of them do dumb things.  If you look at any company this large I would bet you can find instances where consumers as a whole suffered $2 million or more in damages because of the acts of a few dumb employees.

+1

[Picasso]

If I remember reading the event correctly, Buffett needed to make an executive sacrifice in order to get the Salomon bailout.  The whole thing was tarnishing what Buffett had built up at Berkshire (not really from a P/L standpoint but more from a credibility aspect) so he made that famous comment.  If you consider how he fired Sokol, I think he means it.  Initially he was like "Sokol is a cool guy, no big deal."  Then when the media backlash got pretty nasty he had to fire him. 

 

Here was Sokol's comment:

 

"I will never understand why Mr. Buffett chose to hurt my family in such a way, but given that he is rapidly approaching his judgement [sic] day I will leave his verdict to a higher power," Mr. Sokol wrote in an emailed response to The Wall Street Journal."

 

So I mean anything is possible here.  Stumpf did make fun of Buffett's eating habits.

 

“Warren eats a full meal, let me tell you,” said Stumpf, 61. “When the food comes, Warren grabs a salt shaker in his left hand and one in his right hand, and it’s a snowstorm. And I know a snowstorm when I see one because I’m from Minnesota.”

 

In all seriousness, Stumpf couldn't even make a decent argument to Jim Cramer.  The Congressional hearing is going to be 10x as bad.  We'll see what happens but I think Buffett's hands are tied on this.  Stumpf probably gets the boot.