WFC - Wells Fargo

[John Hjorth]

Wells Fargo News release [March 28^th 2019] : Wells Fargo CEO and President Tim Sloan to Retire; Board of Directors Elects Allen Parker as Interim CEO and President.

 

- - - o 0 o - - -

 

Just elaborating on behalf of rb with link. [To me rb's post reads - contrary to ex post experience here on CoBF - a bit like he was in the middle of a kiss or something like that while posting.]

[sleepydragon]

Anyone think buying WFC now seems a even better deal than buying BRK? I have both and am tempted to sell BrK to buy WFC( no more cash left to buy).

[sleepydragon]

https://www.wellsfargo.com/auto-loans/rates/

 

Wells Fargo is advertising 3.9% APR for new car loan on its website.

And the stock now has a dividend yield of 3.7%.

 

I am buying a car. Instead of selling my WFC stocks to buy the car, seems better for me to get that loan from WFC (usually the rate is 25-50 bps lower when you call to get the quote).

 

 

[rb]

Better yet, margin your WFC stock at 3.9% variable and buy the car. That way the 3.9 is tax deductible and likely to go down based on rates futures.

[Viking]

Wells Fargo shares closed today at $48.21. Pretty much right where they were trading 5 years ago.

 

Yes, the retail sales scandal was responsible for part of the underperfornance of the shares. However, it appears to me that there were/are also other things in play that are causing WFC to underperform.

 

Is the fundamental issue that their senior management team completely messed up? I keep waiting for WFC to turn the corner and the company (and the stock price) just keeps underperforming. How are people feeling about WFC these days. The shares look cheap...

[CorpRaider]

It's on the radar for sure.  Read something about Gary Cohen as a potential replacement.  Uh, man I don't know about that.  Did he do well (for shareholders) at GS? 

[sleepydragon]

https://www.thestreet.com/politics/sens-warren-brown-boot-wells-fargo-ceo-14904979?puc=yahoo&cm_ven=YAHOO&yptr=yahoo

 

 

I feel bad for Sloan. He's doing a good job, and the board agrees. Many analysts agree too. But the political pressure from the crazy woman, impo, is just too high.

 

I think the main concerns at this point is what the new ceo will do -- will he do more write downs, one time layoff/expenses, etc..?

 

[Jurgis]

Oh poor multimillionaire CEOs. They are special snowflakes who just cannot stand the pressure. They need your love and coddling. Maybe pay out another 20M or 100M or something so they can sleep better while their organization screws their customers. Maybe you should start a Kickstarter campaign to get Sloan an emotional support animal. Though I'm sure he'd just prefer multimillions in cash. Send him a check to cry on.

[mwtorock]

Oh poor multimillionaire CEOs. They are special snowflakes who just cannot stand the pressure. They need your love and coddling. Maybe pay out another 20M or 100M or something so they can sleep better while their organization screws their customers. Maybe you should start a Kickstarter campaign to get Sloan an emotional support animal. Though I'm sure he'd just prefer multimillions in cash. Send him a check to cry on.

 

same thing can be said to many - Ross Johnson, John Gutfeund, etc. love and coddling is hard to find in the world of riches and fame :p

[Guest Schwab711]

Making Sloan CEO instead of an outsider is probably why the asset cap will be on for longer. He was the COO and CFO during the problems...

[sleepydragon]

Making Sloan CEO instead of an outsider is probably why the asset cap will be on for longer. He was the COO and CFO during the problems...

 

May not be a bad thing, if they can keep buying back.. See quote from Rasputin below:

 

I'm gonna put an end to these 2 madness:

 

1.  Asset cap to WFC is damaging to treasury management business, will cause reduction to NIAC (net income available to shareholders), and 2.  Operational risk within WFC RWA

 

1.  There is another $2 Trillion GSIB with self impose asset cap (without publicly announcing it).  It's called Bank of America.

 

Year End  Total Assets ($ in billions)

2010        2265

2011        2129

2012        2210

2013        2102

2014        2105

2015        2144

2016        2188

2017        2281

 

BAC basically self imposed asset cap for roughly 7 years, while global transactions services (includes treasury management) grew from $5.743 B in 2012 to $7.188 B in 2017 (they had a reorganization in 2012 so prior data is not comparable).  Please go to the annual reports to see revenues, net income available to common shareholders for year 2010-2017, you'll be amazed at how wonderful this asset cap is.  Similar trend to NIAC will occur at WFC going forward, to much lesser degree, however. 

 

I'll let people read WFC's 10K exhibit 13, table 8.  Pay particular focus to line items called : Operating Losses, Outside Professional Fees, and Salaries, Commission, Employee Benefits.

 

2.  For both WFC and BAC, Standardized Approach is governing.  Operational risk is part of Advanced Approach RWA. 

 

For WFC, please refer to this link

https://www08.wellsfargomedia.com/assets/pdf/about/investor-relations/basel-disclosures/2018-third-quarter-pillar-3-disclosure.pdf

 

As of 9/30/2018

Advanced Approach RWA = $1189.464 Billion (includes $319.388 Operational Risk)

Standardized Approach RWA = $1250.215 Billion

 

When WFC talks about CET1 ratio of 11.9% (1.9% beyond management's minimum, 2.9% beyond regulator's minimum), they're talking about Standardized numbers.

 

Say it another way, WFC is already working with operational risk of $380.139 Billion ($1250.215 Billion - $1189.464 Billion + $319.388 B).

[Guest Schwab711]

I don't think the lack of asset growth at BAC/C/JPM was self-imposed by any means.

 

Good luck on the investment - I don't think it looks cheap.

[fuzzhead1506]

Wells Fargo shares closed today at $48.21. Pretty much right where they were trading 5 years ago.

 

Yes, the retail sales scandal was responsible for part of the underperfornance of the shares. However, it appears to me that there were/are also other things in play that are causing WFC to underperform.

 

Is the fundamental issue that their senior management team completely messed up? I keep waiting for WFC to turn the corner and the company (and the stock price) just keeps underperforming. How are people feeling about WFC these days. The shares look cheap...

 

It is silly to look at where a stock has been.  Take a guess at where it is going.  A new CEO is not going to increase the margins or asset turns too much from where it has been in the last 10 years.  But let's be ambitious and say WFC gets back to 13% ROE.  Put a 1.5x multiplier on the book (where JPM is now) and that gets you to a $57 share price?  That sounds like a reasonable margin of safety for 4% real returns (assuming they grow their book value with GDP + inflation) on the next 6-10 years but why are you doin your own investing for that return? 

 

If you instead believe that the market has been wrong for the last 10 years given the new environment and WFC and the rest of the big banks deserve a 1.7x from its' current 1.2x multiple, that gets you to 6% real returns over a decade (or if it takes shorter to get to that valuation then better obviously, but with the threat of another recession always seemingly on the horizon what makes the market believe the banks deserve that multiple before then)?

[cmlber]

Wells Fargo shares closed today at $48.21. Pretty much right where they were trading 5 years ago.

 

Yes, the retail sales scandal was responsible for part of the underperfornance of the shares. However, it appears to me that there were/are also other things in play that are causing WFC to underperform.

 

Is the fundamental issue that their senior management team completely messed up? I keep waiting for WFC to turn the corner and the company (and the stock price) just keeps underperforming. How are people feeling about WFC these days. The shares look cheap...

 

It is silly to look at where a stock has been.  Take a guess at where it is going.  A new CEO is not going to increase the margins or asset turns too much from where it has been in the last 10 years.  But let's be ambitious and say WFC gets back to 13% ROE.  Put a 1.5x multiplier on the book (where JPM is now) and that gets you to a $57 share price?  That sounds like a reasonable margin of safety for 4% real returns (assuming they grow their book value with GDP + inflation) on the next 6-10 years but why are you doin your own investing for that return? 

 

If you instead believe that the market has been wrong for the last 10 years given the new environment and WFC and the rest of the big banks deserve a 1.7x from its' current 1.2x multiple, that gets you to 6% real returns over a decade (or if it takes shorter to get to that valuation then better obviously, but with the threat of another recession always seemingly on the horizon what makes the market believe the banks deserve that multiple before then)?

 

Fuzzhead, (a) your math must be wrong, it's impossible to assume multiple expansion (from 1.2x to 1.7x) with a 10% FCF yield and somehow earn 6% real returns, and (b) why is 1.5x book the right multiple, seems pretty arbitrary?

[sleepydragon]

Wells Fargo shares closed today at $48.21. Pretty much right where they were trading 5 years ago.

 

Yes, the retail sales scandal was responsible for part of the underperfornance of the shares. However, it appears to me that there were/are also other things in play that are causing WFC to underperform.

 

Is the fundamental issue that their senior management team completely messed up? I keep waiting for WFC to turn the corner and the company (and the stock price) just keeps underperforming. How are people feeling about WFC these days. The shares look cheap...

 

It is silly to look at where a stock has been.  Take a guess at where it is going.  A new CEO is not going to increase the margins or asset turns too much from where it has been in the last 10 years.  But let's be ambitious and say WFC gets back to 13% ROE.  Put a 1.5x multiplier on the book (where JPM is now) and that gets you to a $57 share price?  That sounds like a reasonable margin of safety for 4% real returns (assuming they grow their book value with GDP + inflation) on the next 6-10 years but why are you doin your own investing for that return? 

 

If you instead believe that the market has been wrong for the last 10 years given the new environment and WFC and the rest of the big banks deserve a 1.7x from its' current 1.2x multiple, that gets you to 6% real returns over a decade (or if it takes shorter to get to that valuation then better obviously, but with the threat of another recession always seemingly on the horizon what makes the market believe the banks deserve that multiple before then)?

 

Fuzzhead, (a) your math must be wrong, it's impossible to assume multiple expansion (from 1.2x to 1.7x) with a 10% FCF yield and somehow earn 6% real returns, and (b) why is 1.5x book the right multiple, seems pretty arbitrary?

 

If you don’t consider buyback, aren’t book value increase by 20b per year too? With buyback, book value per share increase too. Stock go up regardless if multiple expand

[KCLarkin]

Fuzzhead, (a) your math must be wrong, it's impossible to assume multiple expansion (from 1.2x to 1.7x) with a 10% FCF yield and somehow earn 6% real returns, and (b) why is 1.5x book the right multiple, seems pretty arbitrary?

 

Seems like he is ignoring buybacks and/or dividends?

[fuzzhead1506]

Fuzzhead, (a) your math must be wrong, it's impossible to assume multiple expansion (from 1.2x to 1.7x) with a 10% FCF yield and somehow earn 6% real returns, and (b) why is 1.5x book the right multiple, seems pretty arbitrary?

 

Seems like he is ignoring buybacks and/or dividends?

 

Math:

 

Book Value at Year 1: 180B

Book Value at Year 10: 360B

 

Cost of Equity: 8.0% (GDP@3%+ inflation@3%+ equity kicker@2%)

 

Book value growth becomes null.

 

The excess is what can be used for buybacks or divy's or whatever the team decides is the right way to use the money. Multiple expansion and dividends are the only thing that are returned to the investor after the discount rate is applied.  Return on equity for WFC is prolly gonna run at 11% over the next decade.  Leaving 3% excess and then when you add the multiple expansion return of an extra of a bit over 3% gets you to just over 6%.  Move the cost of equity down if you'd like, but it can't be much lower than 5%??  Perhaps there is margin expansion and the ROE goes up but that is a different assumption.  If you don't consider the equity kicker as part of your discount, that still only gets you to 8% real returns.

 

(b) 1.5x seems reasonable for 2 reasons: 1. Simply because that is what the market has decided is correct over the last decade on average and 2.  banks won't ever likely get back to the leverage levels pre-crisis. 

 

You have to either believe that the market has been wrong on average for the last decade or ROE/ROA has to expand significantly.  ROE/ROA is what determines the valuation with respect to it's own book value of most financials, but especially the banks.  Sustained higher ROE #s command a better valuation.  See JPM vs C

[Spekulatius]

^ Why does the cost of equity depend on GDP growth?

[fuzzhead1506]

^ Why does the cost of equity depend on GDP growth?

 

If banks are not growing their book value at least with GDP + Inflation, they are a not a value add for investors.  Banks (particularly large banks) will grow with the economy.  If they aren't (if the bank is shrinking with respect to GDP) then it means they are loosing market share. 

[sleepydragon]

6-8% per year real turn is pretty good, isn’t it?

That’s what I am shooting for, to double my money with high certainty without violating rule #1.

 

I know maybe you like Tesla or FB better, because you think you can get 30% per year, but how much will you lose if you are wrong?

 

[Viking]

Wells Fargo shares closed today at $48.21. Pretty much right where they were trading 5 years ago.

 

Yes, the retail sales scandal was responsible for part of the underperfornance of the shares. However, it appears to me that there were/are also other things in play that are causing WFC to underperform.

 

Is the fundamental issue that their senior management team completely messed up? I keep waiting for WFC to turn the corner and the company (and the stock price) just keeps underperforming. How are people feeling about WFC these days. The shares look cheap...

 

It is silly to look at where a stock has been.  Take a guess at where it is going.  A new CEO is not going to increase the margins or asset turns too much from where it has been in the last 10 years.  But let's be ambitious and say WFC gets back to 13% ROE.  Put a 1.5x multiplier on the book (where JPM is now) and that gets you to a $57 share price?  That sounds like a reasonable margin of safety for 4% real returns (assuming they grow their book value with GDP + inflation) on the next 6-10 years but why are you doin your own investing for that return? 

 

If you instead believe that the market has been wrong for the last 10 years given the new environment and WFC and the rest of the big banks deserve a 1.7x from its' current 1.2x multiple, that gets you to 6% real returns over a decade (or if it takes shorter to get to that valuation then better obviously, but with the threat of another recession always seemingly on the horizon what makes the market believe the banks deserve that multiple before then)?

 

Fuzzhead, i think acurately understanding what has happened at a company the past 5 years helps greatly in predicting where it is at today amd likely going in the next 5 years. As a manager i learned quickly that the best predictor of future performance is past performance.

 

I am wondering if management at WFC underinvested in the shift to technology, beginning 5 years ago. In the short term, this underinvestment will lead to higher profits (over the short term). WFC seems to now be embracing the shift to technology, but as we learned with BAC this shift takes many years to play out and for the financial benefits to start to flow to the bottom line.

 

Branch count is now falling aggressively. WFC does appear to be pivoting in a positive way. If they are on the right track there are many catalysts that could drive the shares higher in the future.

1.) winding down of retail sales scandal (and all the short term expenses) will improve profitability

2.) pivot to mobile will reduce cost base and improve profitability

3.) return of capital: bank continues to be way overcapitalized; this should allow it to continue to return +100% earnings to investors via CCAR process

 

The big question with WFC: is this a great company that temporarily lost its way and that will over the next couple of years return to greatness? Or is this a damaged company that will simply do ok moving forward (greatness is in the past). Right now my brain is telling me it is the latter but my heart is telling me the former is still possible.

[sleepydragon]

https://finance.yahoo.com/news/warren-buffett-bullish-on-banks-jpmorgan-jamie-dimon-095717582.html

 

How many times have you heard that WEB will comment publicly on a specific group of stocks, not just the business but also making a prediction of the price?

(He frequently talk about businesses but rarely predict stock prices.)

 

[KCLarkin]

 

Math:

 

Book Value at Year 1: 180B

Book Value at Year 10: 360B

 

Cost of Equity: 8.0% (GDP@3%+ inflation@3%+ equity kicker@2%)

 

Book value growth becomes null.

 

The excess is what can be used for buybacks or divy's or whatever the team decides is the right way to use the money.

 

Scenario A: Assume they maintain current P/B and ROE is 11%. They retain all earnings. CAGR is 11%.

Scenario B: Same as A, but they payout 100% of earnings. Dividend yield of ~9.5%.

 

Reality will be somewhere in that range (based on the payout ratio). So I still don't see how your math works.

 

Based on your assumptions, the intrinsic return (assuming no increase in multiple) seems to be 9.5%-11%. 6.5%-8% real (using your assumptions though I would use 2% inflation).

 

--

If the cost of equity is really 8%, then you would also expect multiple expansion.

 

So the expected real return is at least 6.5% + Multiple expansion + ROE increase

 

--

Importantly, you are getting ~10% returns with relatively little valuation risk. If they can maintain 11% ROE, it is unlikely they will trade below book for long periods of time. If they do, the buybacks will add an additional kicker.

 

Whether 10% returns (plus potential upside) are attractive to you depends on how you view other opportunities.

[John Hjorth]

... The big question with WFC: is this a great company that temporarily lost its way and that will over the next couple of years return to greatness? Or is this a damaged company that will simply do ok moving forward (greatness is in the past). Right now my brain is telling me it is the latter but my heart is telling me the former is still possible.

 

Viking,

 

Leaving out the details of your last post by quoting here, & to me an awesome post, because this is to me the key question. To me, the question appears far from easy to answer from where we are now with WFC.

[fuzzhead1506]

6-8% per year real turn is pretty good, isn’t it?

That’s what I am shooting for, to double my money with high certainty without violating rule #1.

 

I know maybe you like Tesla or FB better, because you think you can get 30% per year, but how much will you lose if you are wrong?

 

I can't make heads or tails of a Tesla's current valuation - based on what I could gather from the ARK invest team's discussion this morning 90% of their model's value is in the autonomous driving, at which I still can't say they deserve the price even if they win a government imposed monopoly on the technology.  I like FB.  I could be wrong and the cost is high - hence a higher discount rate that I apply to my model.  But those are aside from the point.

 

Indeed, 6% is a pretty good return.  But you could prolly make less assumptions about something like say... BRK, which you mentioned earlier is your alternative, and make the same returns with less risk of being wrong.  Besides, does WFC ever get to the valuation I posited - 1.7x?  Even if you go only slightly riskier and do something like C which is now at a likely through-the-cycle 8% ROE you'll have an easier time making your 6%.  It is much easier to justify C going to book value (in my mind) than WFC to go to 1.7x without changing the cost of equity.  I would think it is easier to buy BRK than WFC at this point. 

 

Viking, I am ok with you making the assumption that things have progressed from 5 years ago and maybe WFC returns to through the cycle ROE of 13 or 14%, in which case you prolly could have a far easier time justifying 1.7x book.  However, (albeit maybe unjustifiably so) your quip about shares not having gone anywhere is where I got hung up on.  They don't look THAT cheap is all I was trying to say.