WFC - Wells Fargo

[ValueMaven]

I've been adding a lot of WFC recently....

[racemize]

What I don't get is that it just got down to peers in terms of valuation.  I'd be interested if it were trading at C levels, but getting next to JPM/BAC--I'd rather own the other two.  JPM has just as good of underlying returns over the last 10 years (if not better), and BAC has a lower cost of deposits.

[rb]

What I don't get is that it just got down to peers in terms of valuation.  I'd be interested if it were trading at C levels, but getting next to JPM/BAC--I'd rather own the other two.  JPM has just as good of underlying returns over the last 10 years (if not better), and BAC has a lower cost of deposits.

The difference comes from the fairly non-existent derivatives book of Wells.

[Rasputin]

I highly suggest people familiarize themselves with banks' Basel 3 pillar 3 disclosure

 

Here is WFC's

 

https://www08.wellsfargomedia.com/assets/pdf/about/investor-relations/basel-disclosures/2017-third-quarter-pillar-3-disclosure.pdf?https://www.wellsfargo.com/assets/pdf/about/investor-relations/basel-disclosures/2017-third-quarter-pillar-3-disclosure.pdf

 

Starting on page 22, you can see their derivatives exposure...it is NOT fairly non-existent, smaller than BAC's and JPM's (40% of BAC's) but $19 B in RWA is pretty decent size imo.

 

I compare wfc, jpm and bac pillar 3 disclosures every quarter. 

 

[rb]

I highly suggest people familiarize themselves with banks' Basel 3 pillar 3 disclosure

 

Here is WFC's

 

https://www08.wellsfargomedia.com/assets/pdf/about/investor-relations/basel-disclosures/2017-third-quarter-pillar-3-disclosure.pdf?https://www.wellsfargo.com/assets/pdf/about/investor-relations/basel-disclosures/2017-third-quarter-pillar-3-disclosure.pdf

 

Starting on page 22, you can see their derivatives exposure...it is NOT fairly non-existent, smaller than BAC's and JPM's (40% of BAC's) but $19 B in RWA is pretty decent size imo.

 

I compare wfc, jpm and bac pillar 3 disclosures every quarter.

Ok, I was being a little glib when I said that Well's derivatives book doesn't exists. They're not only listed in the Basel pillar 3 disclosure. They're also in the notes to the financial statements.

 

First of all pulling the up the pillar 3 diclosures for WFC and BAC I observe that BAC has much less detail in their disclosure than WFC. BAC just gives you a total RWA and doesn't break down the categories like WFC does. Secondly pulling the Wells 10-Q I notice that the numbers are different between the two. I guess there must be some different standards for aggregating these. But since BAC doesn't break down their derivatives in pillar 3 I'll have to use financial statements to compare like with like. It's note 12 for WFC and note 2 for BAC.

 

This is how I look at this stuff.

 

Bucket 1: Interest Rates and Foreign Exchange. WFC=7.4 trillion BAC=34.4 trillion. Every bank will have tons of these and it's pretty simple and benign stuff. I'm not worried about these at all.

 

Bucket 2: Equity and Commodity. I'm a bit more concerned with these but not overly so. They're usually pretty well hedged. A floor may want to dial risk up or down a bit but it's usually at the margin. WFC=250 billion BAC=1.5 trillion.

 

Bucket 3: Credit Derivatives. This is the really scary stuff. WFC=30 billion BAC=1.2 trillion.

 

So yea Wells has 30 billion of the really scary stuff. But honestly that's pretty non existent on a 2 trillion balance sheet which is what I was getting at. Bank of America has 1.2 trillion of the scary stuff. Wells's total positions actually fit in the rounding error for Bank of America. Also if you move away and look at the total picture BAC dwarfs WFC in all derivative categories. All this while BAC has a similar sized balance to WFC.

[Rasputin]

While notional value is always scary, notional value does not equal possible losses.  We can't compare possible losses from derivatives across banks just by looking at notional value, because we don't know the detail of the banks trading positions.  This is my view.

 

The fed's view:

 

From 2017 DFAST

 

"the relative size of losses across firms depends not on nominal portfolio

size but rather on the specific risk characteristics of each BHC’s trading positions, inclusive of hedges.  Importantly, these projected losses are based on the

trading positions and counterparty exposures held by these firms on a single date (January 3, 2017) and could have differed if they had been based on a different

date."

 

We are lucky that we have an independent 3rd party that goes through the GSIBs books and from my understanding, the fed rotates their stress teams, so no team work on the same GSIB every year. 

 

I use stress capital buffer (as defined by ex governor Tarullo) to see which bank loses the least/most % of capital in a severely adverse scenario.

 

WFC lost the least % of capital in 2015 and 2017 dfast, with BAC as runner up.  BAC had the lowest scb in 2016 dfast with WFC as runner up.

 

I prefer WFC's balance sheet vs BAC's (i wish BAC got the same consent order so they will shrink their trading book, worst part of their business), but it's a shame that WFC's management is still pompous even after the consent order.   

 

From today's Barron's:

 

“We’re the last bank, not the first bank, in the past 10 years to have gone through some sort of a breakdown that led to reputational damage that had to be worked through,” Shrewsberry says. “It’s not a benefit to go last, but it’s not unique.”

 

I view WFC as roughly 7-10% cheaper than BAC and I have been nibbling.

[benchmark]

While notional value is always scary, notional value does not equal possible losses.  We can't compare possible losses from derivatives across banks just by looking at notional value, because we don't know the detail of the banks trading positions.  This is my view.

 

The fed's view:

 

From 2017 DFAST

 

"the relative size of losses across firms depends not on nominal portfolio

size but rather on the specific risk characteristics of each BHC’s trading positions, inclusive of hedges.  Importantly, these projected losses are based on the

trading positions and counterparty exposures held by these firms on a single date (January 3, 2017) and could have differed if they had been based on a different

date."

 

We are lucky that we have an independent 3rd party that goes through the GSIBs books and from my understanding, the fed rotates their stress teams, so no team work on the same GSIB every year. 

 

I use stress capital buffer (as defined by ex governor Tarullo) to see which bank loses the least/most % of capital in a severely adverse scenario.

 

WFC lost the least % of capital in 2015 and 2017 dfast, with BAC as runner up.  BAC had the lowest scb in 2016 dfast with WFC as runner up.

 

I prefer WFC's balance sheet vs BAC's (i wish BAC got the same consent order so they will shrink their trading book, worst part of their business), but it's a shame that WFC's management is still pompous even after the consent order.   

 

From today's Barron's:

 

“We’re the last bank, not the first bank, in the past 10 years to have gone through some sort of a breakdown that led to reputational damage that had to be worked through,” Shrewsberry says. “It’s not a benefit to go last, but it’s not unique.”

 

I view WFC as roughly 7-10% cheaper than BAC and I have been nibbling.

 

Have you sold some of your BAC? I remember that you were really bullish on BAC....

[gary17]

interesting. thanks

i have been tempted to buy some WFC too ; i gather it is cheaper but hard for me to know if it’s cheaper for a good reason — the  damage to the brand ...  is that a permenant thing i wonder. 

 

While notional value is always scary, notional value does not equal possible losses.  We can't compare possible losses from derivatives across banks just by looking at notional value, because we don't know the detail of the banks trading positions.  This is my view.

 

The fed's view:

 

From 2017 DFAST

 

"the relative size of losses across firms depends not on nominal portfolio

size but rather on the specific risk characteristics of each BHC’s trading positions, inclusive of hedges.  Importantly, these projected losses are based on the

trading positions and counterparty exposures held by these firms on a single date (January 3, 2017) and could have differed if they had been based on a different

date."

 

We are lucky that we have an independent 3rd party that goes through the GSIBs books and from my understanding, the fed rotates their stress teams, so no team work on the same GSIB every year. 

 

I use stress capital buffer (as defined by ex governor Tarullo) to see which bank loses the least/most % of capital in a severely adverse scenario.

 

WFC lost the least % of capital in 2015 and 2017 dfast, with BAC as runner up.  BAC had the lowest scb in 2016 dfast with WFC as runner up.

 

I prefer WFC's balance sheet vs BAC's (i wish BAC got the same consent order so they will shrink their trading book, worst part of their business), but it's a shame that WFC's management is still pompous even after the consent order.   

 

From today's Barron's:

 

“We’re the last bank, not the first bank, in the past 10 years to have gone through some sort of a breakdown that led to reputational damage that had to be worked through,” Shrewsberry says. “It’s not a benefit to go last, but it’s not unique.”

 

I view WFC as roughly 7-10% cheaper than BAC and I have been nibbling.

[Rasputin]

BAC is roughly 70% of my portfolio.  At one point in 2016 it was 125% of my portfolio. 

 

I think it's more likely than not that WFC's reputation will recover though it might take 3-5 years for WFC to be rid of this issue.  WFC's community banking still grew deposit by 4% from Q4 2016 to Q4 2017.

 

Anybody remembers this?

 

https://www.forbes.com/sites/halahtouryalai/2011/10/04/senator-durbins-reckless-message-to-bofa-customers-find-a-new-bank/#546412b99dfa

 

https://www.reuters.com/article/us-bank-of-am-capitalresubmission/bofa-suspends-buyback-div-increase-after-capital-error-idUSBREA3R0R920140428

[SlowAppreciation]

Short thesis on CACC, with lots of mentions of WFC: https://www.plainsite.org/realitycheck/cacc2.pdf

[AzCactus]

Pretty funny hearing Charlie defend Wells Fargo. 

[nkp007]

https://www.wsj.com/articles/justice-department-widens-wells-fargo-sales-investigation-to-wealth-management-1521215076

 

The Justice Department and Securities and Exchange Commission are conducting the investigation into the wealth-management business, these people said. Agents from the Federal Bureau of Investigation have been interviewing some wealth-management employees in the Phoenix area as recently as this week, some of these people said.

 

 

WFC likely needs CEO and top management. Political attacks won't stop until that happens. In addition, should help jolt the culture at the top (with an outside hire).

[Viking]

It continues to surprise me how aggressive the government has been and continues to be with WFC. AIs WFC really so rotten to the core or is there something else going on?

 

The stock is trading at the same price it was trading at three years ago. Since that time, economic growth has been great, interest rates are much higher and expected to increase further (benefitting NIM) and tax reform has significantly boosted net earnings. Crazy.

[CorpRaider]

I never liked Norwest, but maybe I will kick the tires if it runs back toward the lows.

[Spekulatius]

It continues to surprise me how aggressive the government has been and continues to be with WFC. AIs WFC really so rotten to the core or is there something else going on?

 

The stock is trading at the same price it was trading at three years ago. Since that time, economic growth has been great, interest rates are much higher and expected to increase further (benefitting NIM) and tax reform has significantly boosted net earnings. Crazy.

 

Yes, but WFC’s earnings have stagnated during that time and the stock wasn’t cheap to begin with and it isn’t cheap now. It’s not crazy, it is reversion to the mean.

[CorpRaider]

"But it expensive and something bad might happen."

[John Hjorth]

It continues to surprise me how aggressive the government has been and continues to be with WFC. Is WFC really so rotten to the core or is there something else going on? ...

 

I can't help to speculate, that what we perhaps are observers to here, is public budget hoarding / storming - one of worst tumors in public finances. We are in the late innings in the battle post GFC between these "bad boys" [the banks] "who almost pushed the world out over the cliff" and the public and the regulators. The regulators are grapping for every straw and trying to penetrate every crack in the hull - how tiny it may seem - and turn every stone, where there is just a bit of smell of a case, the motive [perhaps] being to keep up own allocated ressources & budgets, justifying exisiting budgets [those most likely to be reduced going forward] by starting up investigations and perhaps also cases.

 

It's like lions hunting. Spot the weak creature in the hoard, isolate it, and then go for it. Not pretty. Done to survive.

 

At least WFC is entitled to equal and fair treatment, compared to it's competitors.

[Spekulatius]

It continues to surprise me how aggressive the government has been and continues to be with WFC. Is WFC really so rotten to the core or is there something else going on? ...

 

I can't help to speculate, that what we perhaps are observers to here, is public budget hoarding / storming - one of worst tumors in public finances. We are in the late innings in the battle post GFC between these "bad boys" [the banks] "who almost pushed the world out over the cliff" and the public and the regulators. The regulators are grapping for every straw and trying to penetrate every crack in the hull - how tiny it may seem - and turn every stone, where there is just a bit of smell of a case, the motive [perhaps] being to keep up own allocated ressources & budgets, justifying exisiting budgets [those most likely to be reduced going forward] by starting up investigations and perhaps also cases.

 

At least WFC is entitled to equal and fair treatment, compared to it's competitors.

 

I think WFC is just a convenient punching bag right now. Let’s say you are an ambitious employee in a government institution regulating banks - who are you going after if some irregularities surface, which are sure to surface in any bank with 100,000 of employees? Going after WFC is probably the easiest way to get some headlines, get some fines for the government, which will look great on your resume.

 

That is why reputation is so important in the banking business. Both the customers and the regulators need to trust you. Losing money is one thing, but losing reputation is worse, WEB said this better then anyone. WFC lost a good chunk of their reputation and it is going to be very expensive for them.

 

This is what the people that scoff at the few hundred million of settlement costs are missing.

[RadMan24]

They'll also be better off in the future b/c of this.     

 

So not worried.

[tng]

BAC was a punching bag for regulators and politicians for many years, even though they were strong armed into acquiring Merrill and against executing the material-adverse clause to dump Countrywide. I expect WFC to continue to get kicked for at least another 1-2 years.

[aws]

I've been nibbling at this for a while and getting close to a full position now.  I'm surprised just how weak it has been this month as every day seems to be another 1-2% drop.  I have to think the downside is quite minimal relative to the market unless there really were a lot more cockroaches in the kitchen.

 

Not exactly a strong thesis, but relative weakness to other banks, huge additional buybacks, and presumably a return on assets that will tick up along with consistently rising rates over the next couple of years. 

[sleepydragon]

Bottom line is they are Not losing many customers  and deposits keep increasing — unlike FB.

Revenue shall stay the same or keep growing.

Buying at this price I will be ok even if stock market is closed for 10 years.

A 20% positions for me.

[boilermaker75]

Bottom line is they are Not losing many customers  and deposits keep increasing — unlike FB.

Revenue shall stay the same or keep growing.

Buying at this price I will be ok even if stock market is closed for 10 years.

A 20% positions for me.

 

Why WFC is my second largest position. Just wrote some WFC April 6 expiration 50-strike puts for $0.60 per share.

[John Hjorth]

WFC 2018Q1 out yesterday.

 

Both loan book and deposits are actually still shrinking. [Not by much though.]

 

On top of the earnings release I noted the following:

 

Our preliminary financial results may need to be revised to reflect additional accruals for the CFPB/OCC matter, discussed on page 2, when we file our final financial statements in our Quarterly Report on Form 10-Q.

 

So there may be changes between this earnings release deemed preliminary, and the WFC 10-Q to be filed later. It reads to me like some departments in WFC are burried in stuff related to the CFPB/OCC cases, and can't keep up in relation to the reporting cycle for the bank.

 

Other general stuff about the big four US banks has been posted about the 2018Q1 for WFC, JPM and C within the last day in the C topic.

[rb]

John,

 

They didn't bury stuff related to CFPB/OCC. It's a timing issue. They're actively negotiating a fine with the CFPB and OCC. This is well known. The issue seems to be that the fine is imminent but also the amount is not yet known. (Btw, if it's 1 billion that's really good. I expected significantly more) So they're not sure whether the fine should be booked in Q1 or Q2. They can't do an accrual cause they don't know the amount. They could have postponed reporting (doesn't look good) or they could do what they did and report preliminary with a caveat. This is actually not a big deal but more accounting rules related.

 

On the deposit and loans side. They've said that in order to comply with the consent order they're pulling back on taking deposits from other financial institutions. They have about $100B of those and they're low margin deposits. In the quarter they've decreased them by $15B and will continue to do so. There were also lower deposits in the wealth management business mainly related to asset rotation. I'm guessing due higher interest on bonds.

 

On the loans side they've have a big decline in auto loans. They're saying they're cutting back on risky loans and increasing the credit quality of the portfolio. If that's true I'm good with that. I don't think it's a scandal thing because you don't really get to choose your auto lender. So I'd tend to believe them.

 

Overall I'd say it was a meh quarter. Not good but not bad either. But given the situation they're in I'd say it was ok. The core business looks to be holding well. That's good.

 

The thing is that at these levels the company looks cheap. It's my second largest position and I'm thinking of adding more at this level or below. The reason why I haven't done it already is because it's already a large position. Ideally I'd like to add at a lower price but I don't know if it'll go there. I'll probably end up adding some around here then cut back in the 60s to right size the position.