WFC - Wells Fargo

[boilermaker75]

wfc is daily journal's largest holding, mine too as of yesterday.

 

My second largest holding, behind BRKB.

[CorpRaider]

How do you guys choose which banks to invest in given that they're all trading at pretty low valuation? JPM, BAC, WFC, C? Or even GS and MS?

 

Tough isn't it?  I think maybe you could argue prefer USB because it is smaller with more room to grow and has a similar historical return profile/quality to WFC.  I don't do the pure investment banks because it seems like they are great businesses....for the employees.  I think I prefer WFC over BAC for lower exposure to IB and I don't like the huge BAC exposure to the wire house business.  JPM...tough...best CEO but how long and WFC is obviously less beloved right now. 

 

But I've not done anything, probably because these guys have pretty much all almost gone bust like three times in my memory and have been reformed to make it a lot easier/palatable to wipe out the equity holders. 

[khturbo]

The required capital ratio is included in the fact that they are well over it as are pretty much all the majours, not just Wells.

 

How would you value financials on the back of an envelope? What's your valuation for the thing? Is it overvalued? How are they not still top of the line? Are they under-earning on their assets? Do they have a pile of overvalued assets that are sucking wind? Please point me in the right direction cause I would really like to know where I am really wrong here.

 

Back of the envelope I'd take a through the cycle ROTA and multiply by the leverage ratio to get a through the cycle ROTE. I use 15% ROTE, that same 4% growth number, and a discount rate of 10%. With $31.49 of TBV I get NPV = (31.49*(.15-.04))/(.10-.04) = ~$57.

 

Obviously you can feel different about any of those numbers, but the biggest difference here is that you aren't  deducting the portion of earnings that WFC needs to grow that 4% over the long-term. If you want to say that they're overcapitalized by $10bb or $20bb or whatever then maybe you pull some equity out of the model, which will get you a higher ROTE, then add the value of the excess capital back on top of the resulting value, but when you just use actual earnings as the numerator you're assuming they never need any more capital ever. That might be true for another business but not a bank.

[LightWhale]

How do you guys choose which banks to invest in given that they're all trading at pretty low valuation? JPM, BAC, WFC, C? Or even GS and MS?

 

One option is to buy VFH, Vanguard's Financials ETF. The above banks all comprise the largest holdings, together with...BRK.

https://investor.vanguard.com/etf/profile/portfolio/vfh

 

I hope that proposing an ETF doesn't turn me into a value investing sinner.

[LowIQinvestor]

Be careful, I literally just bought a ton of Wells Fargo which means we are headed for a Depression....

 

never thought WFC would yield 3.5% and trade at single digit PE in this macro environment

 

Godspeed

 

[aws]

First shares traded this month were at a 55 handle and now we are already at a 47 handle six days into the month.  We haven't even gotten to the buyback blackout period either.  Crazy how quickly the narrative has shifted from higher rates equal higher profits to potential inverted yield curve destroying borrow-short lend-long business model.

[CorpRaider]

How do you guys choose which banks to invest in given that they're all trading at pretty low valuation? JPM, BAC, WFC, C? Or even GS and MS?

 

One option is to buy VFH, Vanguard's Financials ETF. The above banks all comprise the largest holdings, together with...BRK.

https://investor.vanguard.com/etf/profile/portfolio/vfh

 

I hope that proposing an ETF doesn't turn me into a value investing sinner.

 

Yeah or pretty much just any value index which is (and has been) heavily overweight financials.

[JBTC]

Yes, reported annual eps has been around $4 since 2014, and I have them at $4.25 for 2018.

 

But that's the past, and reported eps is just the beginning.  I go through each line item on both revenue side and expense side, and try to figure out where reported eps is going over the next 5 years.

 

Based on what I see, and my experience going through much worse problems at BAC, I'm satisfied that reported eps in in 5 years will be far higher than 2018.

 

Would you mind sharing what you see - EPS will be far higher because?

 

 

[John Hjorth]

JBTC,

 

I'm not Rasputin, but the key here is to do some calculations about the share buybacks for WFC.

[JBTC]

JBTC,

 

I'm not Rasputin, but the key here is to do some calculations about the share buybacks for WFC.

 

Thank you John. Buybacks alone could make EPS a bit higher, but seem unlikely to make it "far higher" as suggested.

 

I have to say I am surprised that it's been more than two years since the account-opening scandal initially broke. I thought at the time that by now, the co would have completely sorted everything out and started performing. I assumed it's a fundamentally good company and has good management and culture etc despite some issues.

 

Do people still think that and why?

 

[Guest Schwab711]

If they have an asset ceiling for too long (multiple years) then their treasury management is going to become tricky and NIM will contract some for a prolonged period. I don't think WFC is the slam dunk it looks like at the moment. I don't see how earnings grow appreciably with anything but a short term asset ceiling.

 

I've owned WFC this year. I really like their bank model. I do think I failed to appreciate the significance of the asset ceiling and the unknown of how long it will last.

[rb]

If they have an asset ceiling for too long (multiple years) then their treasury management is going to become tricky and NIM will contract some for a prolonged period. I don't think WFC is the slam dunk it looks like at the moment. I don't see how earnings grow appreciably with anything but a short term asset ceiling.

 

I've owned WFC this year. I really like their bank model. I do think I failed to appreciate the significance of the asset ceiling and the unknown of how long it will last.

At this point I'm not too worried about the asset ceiling. I agree that if it'll be in place for a long time it will cause serious damage. But does the Fed really want to knee cap one of the majour banks? I don't think so. If evidence to the contrary surfaces I will change my opinion.

 

What I like about the asset ceiling is that management at WFC turned out to be a bit delusional and this served as a big wake-up call. That can be very healthy for a business. Wake up, get your ass in gear, dust off the cobwebs, increase efficiency, etc. Wells seems to be doing that and that's promising. It'll come out a much stronger company on the other end.

 

What seems to be happening is not so much that they're hurt by the asset ceiling, but that they've taken their foot off the gas a bit as they sort all of this stuff out and JPM and BAC are eating some of their lunch. Frankly that's fine if they sort out their business and come out swinging at the other end. One of the reason why WFC seemed like a slam dunk is that they had a very good business model and the were executing on it. The business model is still there. There were negative headlines, and stock price declines, so it has hair. But then when it was a slam dunk you didn't get this valuation. That's this business of ours. If we want good valuations  we'll have to deal with some hair.

 

Ask yourself this. Would you own JPM without Jamie in charge?

[nkp007]

They weren't going to lend enough for the asset ceiling to matter.

 

Hopefully they keep returning tons of capital and this is perceived as a huge cash return story.

[Spekulatius]

I played with RB‘s formula a bit and can’t really put any fault with it, so I bought shares as well. Using my ownnheuritcs and assuming the bank can grow by 4% in size, buy back 3% of their shares annually and adding a 3.6% dividend yield, I get a 10.6% expected return.

 

I do want to point out that some pipeline companies I own seem  to look equally good or even better: ENB yields 6.5% and if they can grow by 5%, then the return is 11.5% ( buybacks are unlikely with ENB). WMB gets similar results. Both  WMB and ENB have double digit dividend growth expected for 2019 and 2020, so this makes the current yields look pretty good. But I own these in size already ( and KMI) so WFC fits into the same theme, but with different business opportunities and risks very nicely,

[gary17]

this is the crazy disruption tech that IMO is big risk to banks!

https://www.cnbc.com/2018/12/13/robinhood-goes-after-banks-with-checking-and-savings-accounts.html

[StubbleJumper]

this is the crazy disruption tech that IMO is big risk to banks!

https://www.cnbc.com/2018/12/13/robinhood-goes-after-banks-with-checking-and-savings-accounts.html

 

 

I wouldn't bee too worried.  We've had outfits like this in Canada for 20 years and they've barely made any market share.  They are a great alternative for people like me who detest in-person transactions and have mainly simple banking needs.  But, as soon as you get somebody with more complex needs or somebody who likes a little bit of hand-holding, the low-cost low-service model doesn't work.  People like that need a full-service bank.

 

One of the real head-scratchers for me is that these outfits are not used by more people.  It strikes me as a no-brainer for a large segment of the market that they could invest a few hours of time have their their accounts moved to a no-frills provider and save perhaps $5 or $10 per month for perpetuity.  For the misery of a couple of hours of paperwork, a guy with simple needs might save ~$1,000 in charges over the next 10 years, easy peasy.  But, it seems that banking services are very sticky and people are either content to pay their $10/month in service charges or perhaps they just don't want to think of it (financial stuff is hard, right?).

 

Over time, however, these entrants exert a bit of discipline on the main players and prevent the worst rapacious treatment of customers.  But whatever.  The major banks in the US are going to improve their automation and downsize their branch network anyway, so that streamlined cost structure will enable lower charges to clients.

 

 

SJ

[no_free_lunch]

I am with you Stubble.  I use a similar service and have found it is an uphill battle getting people to switch.  These institutions hold significant funds on your behalf so trust is a very real issue and the low cost/unknown institution works against them in that regard.

[rb]

It's not just trust, but doing anything except simple chequing, savings, credit card can become a headache. Try to send or receive a wire or try to get a certified cheque the next day to buy a car. If you ever went through one of these experiences with a low cost bank you'll swear them off. The experience is made exponentially worse by the fact that when you need one of these services you really need it. You're stressed or pressed for time or whatever.

 

Furthermore, despite being low cost they didn't beat the big banks on rates for credit products, i.e. mortgages.

[Spekulatius]

I also expect the 3% interest on checking to be a bait sad come with balance limits. Otherwise, people will use it as a money market account. I have a checking account with a credit union that  offers interest on checkin, but only up to 20k balance.

[aws]

Robinhood must lose a fortune on their free option trading offerings, and this seems like another big money loser for them.  There's no way they can have any net interest margin offering 3% at current interest rates.  Maybe they figure the average user will produce enough fee or other revenue to compensate for the loss on interest margin, but I would have to expect that 3% rates would attract a lot of very expensive customers.  The kind who would just park the maximum allowed for only as long as Robinhood is the best interest rate around, and then move ship at the first opportunity at something better.  If the limits are high that could get expensive quick.  I guess it doesn't matter much when they seem to have unlimited venture capital that doesn't care yet about turning a profit, but something like Moviepass is a good example of how quickly that falls apart when the money dries up.

 

So anyway I guess they would most likely attract away unprofitable customers from other low cost banks, and then for only as long as they can keep their money losing operations afloat.  It would take a lot more to put a dent in the big banks.

[Sunrider]

No, they monetise differently - they sell the order flow.

 

Robinhood must lose a fortune on their free option trading offerings, and this seems like another big money loser for them.  There's no way they can have any net interest margin offering 3% at current interest rates.  Maybe they figure the average user will produce enough fee or other revenue to compensate for the loss on interest margin, but I would have to expect that 3% rates would attract a lot of very expensive customers.  The kind who would just park the maximum allowed for only as long as Robinhood is the best interest rate around, and then move ship at the first opportunity at something better.  If the limits are high that could get expensive quick.  I guess it doesn't matter much when they seem to have unlimited venture capital that doesn't care yet about turning a profit, but something like Moviepass is a good example of how quickly that falls apart when the money dries up.

 

So anyway I guess they would most likely attract away unprofitable customers from other low cost banks, and then for only as long as they can keep their money losing operations afloat.  It would take a lot more to put a dent in the big banks.

[cmlber]

this is the crazy disruption tech that IMO is big risk to banks!

https://www.cnbc.com/2018/12/13/robinhood-goes-after-banks-with-checking-and-savings-accounts.html

 

At 1.5x TBV and 10x earnings, you basically have to believe Robinhood will not make Wells Fargo disappear in under 3 years in order to get your money back...  From there it's gravy. 

 

I'm in the camp of Robinhood having no long-term impact.  There are already plenty of online banks that will pay you 2-2.5%, and the big banks continue to grow deposits.  People don't like change, are too lazy to switch, and still value the convenience of branches & human interaction for certain purposes. 

 

[rb]

Brokerage is capital light. With banking you need capital. Lots of capital, like regulatory capital that regulators look at. Bank regulators also don't like the " "Amazon model" that these guys are talking about. They want banks to make money.

 

I don't think that they have access to so much capital as people think. Because it doesn't make sense. In the end even if everything works out they're unlikely to make more money that banks currently do. So as an investor why would you forgo returns on your capital for who knows how many years just so you can make 10-15% at some point in the future?

[cmlber]

Brokerage is capital light. With banking you need capital. Lots of capital, like regulatory capital that regulators look at. Bank regulators also don't like the " "Amazon model" that these guys are talking about. They want banks to make money.

 

I don't think that they have access to so much capital as people think. Because it doesn't make sense. In the end even if everything works out they're unlikely to make more money that banks currently do. So as an investor why would you forgo returns on your capital for who knows how many years just so you can make 10-15% at some point in the future?

 

Capital is the least of their problems at 3% interest on deposits...  What are they going to do, go pay 3% for flighty deposits from the types of customers willing to move around for yield and invest it in treasuries earning 2.7%?  There's a reason if you read closely this offer is "invite-only"... i.e. we want to get marketing buzz on this 3% thing but not really offer it to many people because we'd go broke.

[SHDL]

https://www.bloomberg.com/opinion/articles/2018-12-13/robinhood-s-3-interest-checking-is-just-a-money-market-fund?srnd=premium