WFC - Wells Fargo

[rolling]

Hi rolling,

 

1.  The market cap is $222.5 Billion using $48.9 share price and 4.5494 Billion shares outstanding

 

2.  Look at the line called Net Income Applicable to Common Stock (instead of Net Income) because there was $1.7 B preferred stock dividend in 2018.  NIACS was $20.7 B in 2018

 

For me, I try to get to core operating earnings by reversing one time charges or gains.  Just like BAC prior to 2017, WFC's 2018 income statement is full of one time gains and charges.  This core operating earnings is subjective but below is how I did mine for 2018

all numbers are post tax, negative means I subtract that number from reported NIACS, positive means I add that number to reported NIACS

 

Reported NIACS $20.7 B

Provision minus Net Charge-Offs Negative $0.8 B

Gain on Security Sale Negative $1.32 B

Gain on Loan sale Negative $2.06 B

Amortization of Intangibles $0.87 B

Litigation Accrual $1.47 B

Tax Effects $0.19 B

LOCOM Puerto Rico Sale $0.14 B

Redemption of Preferred Charges $0.15 B

 

Core Operating Earnings $19.34 B or roughly $4 per share.  That's my personal core eps, everybody should have their own. 

 

 

What Wells Fargo is going through is not only adding a lot of operating expenses but also is very business disruptive.  So they're being hit both on the revenue side and the expense side.  One of the lesson I learned from my investments in BAC is that my estimate tended to be a little high during their tough periods and my estimates were way low during their normalized period. 

 

Wells' revenue has been buffetted by accretable yield from the Wachovia loans bought in 2018.  You can see how much of these were added to WFC's revenue on Note 6 Table 6.20 of the 2018 10K.  They were $1.1 B of interest income and $2.4 B of non interest income (part of gains on loan sale).  This balance is running off and will be gone in the next few years.

Thank you. I could invest in WFC just because of this post. you did all the work here, and seems a great one.

[Viking]

Well i am only part way through the conference call and i must say i am surprised. WFC is in deep shit. And it might be getting worse, if that is possible. They sound simply beat on the call; very robotic with answers; no solutions just acceptance on where they are at. Perhaps we are getting closer to the capitulation point with their large and loyal investor base. Today WFC is down 3% when the other big US banks are up 3-5%. Here are my initial key take aways:

1.) They are no where near being done complying with the consent order; in some respects it sounds like they are still in the early stages???

2.) no time line for CEO search; some scepticism about hiring a non-Wall Street person given how unique the banking business is

3.) until CEO is in place, overall strategy will be put on hold (no plans to get more aggressive with cost cutting... business as usual for now)

4.) appears they are losing ground to competitors and are unable to do anything about it.

5.) appears long term shareholders are getting frustrated; to the point they are selling and moving on.

[meiroy]

 

 

It's time for Buffett to get involved actively considering all his "passive" involvement by supporting the previous CEOs and the bank in interviews. He owes this to his shareholders. Otherwise, one would seriously just be better off owning an index.

 

 

 

 

 

 

[undervalued]

Did "Everything is awesome" song just stop all of a sudden?

 

https://www.cnn.com/2019/04/12/investing/wells-fargo-bank-earnings/index.html

 

I think it's better this way. If regulators think everything is great and not painful for the wrongdoers, they'll throw more shit to the fan.

 

I felt bad for Sloan.. Can you imagine working hard 32 years in company going from no one to CEO and BAM.. shits hit the fan and you're only on the top job for about 2 years? Such is life.

[sleepydragon]

The CEO and the CFO ‘s boss just got fired and they are not sure how long they will keep  their job.

Of course they won’t be that enthusiastic in the ER call.

The chairman of the board is disappointing to me. She should have done more to keep the transition smoother. At least keep Sloan longer till a new CEO is found. She should be the one to be fired!

[Spekulatius]

The interim CEO has to be defensive, he can’t make commitments on behalf of the new CEO. I ams Ort of Ok with the asset cap. It certainly prevents them from doing something stupid late in the cycle and thy can buy back shares quite cheaply. Organic reinvestment is preferable, but I am not sure it’s a great idea to put the foot on the gas now. if they can continue to pay an almost 4% dividend and buy back 6% of their outstanding shares this year as well and remain overcapitalized, I am quite happy.

 

(Edited for typo)

[gfp]

The interim CEO has to be defensive, he can’t make commitments on behalf of the new CEO. I ams Ort of Ok with the asset cap. It certainly prevents them from doing something stupid late in the cycle and thy can buy back shares quite cheaply. Organic reinvestment is preferable, but I am not sure it’s a great idea to put the foot on the gas now. if they can continue to pay an almost 6% dividend and buy back 6% of their outstanding shares this year as well and remain overcapitalized, I am quite happy.

 

6% dividend?  What am I missing?

[shalab]

They bought back 7% of outstanding diluted shares in one year. If they retire 7.5% of shares this year (at the same rate) and pay 3.75% dividend yield, we are at 11.25 % return. Not shabby.

 

The interim CEO has to be defensive, he can’t make commitments on behalf of the new CEO. I ams Ort of Ok with the asset cap. It certainly prevents them from doing something stupid late in the cycle and thy can buy back shares quite cheaply. Organic reinvestment is preferable, but I am not sure it’s a great idea to put the foot on the gas now. if they can continue to pay an almost 6% dividend and buy back 6% of their outstanding shares this year as well and remain overcapitalized, I am quite happy.

[Spekulatius]

The interim CEO has to be defensive, he can’t make commitments on behalf of the new CEO. I ams Ort of Ok with the asset cap. It certainly prevents them from doing something stupid late in the cycle and thy can buy back shares quite cheaply. Organic reinvestment is preferable, but I am not sure it’s a great idea to put the foot on the gas now. if they can continue to pay an almost 6% dividend and buy back 6% of their outstanding shares this year as well and remain overcapitalized, I am quite happy.

 

6% dividend?  What am I missing?

 

Sorry, typo, the dividend yield is 3.9%.

[Guest eatliftinvestgolf]

Hi all, this is my first time posting. I have been reading the message board for a while as I keep a significant percentage of my public equity portfolio in Berkshire.  I am an investment professional in the private markets and invest in public markets only for myself.

 

Some of these comments may be overlapping a bit with prior ones in the thread.

 

I recently initiated a position in Wells Fargo at ~$47 due to compelling risk/reward trade-off.  Given Berkshire can't go over 10% ownership, I wanted to upgrade my exposure.  I think from these levels Wells Fargo can earn a highly certain 13-15% compounding pre-tax return over the next decade due to underlying profitability outlook of the franchise, significant buybacks, and a modest P/B multiple re-rating over the next decade.

 

Although many are focused on the scandal and recent damages to the company, I believe that this is a great entry point to Wells Fargo:

- They are purchasing a substantial amount of common equity at prices lower than average historical P/B. 

- Tax reform has improved the warranted valuation for a banking institution that has pricing power: hard to believe the benefits will be fully competed away in the regulated oligopoloy that America has today.

- Due to post-crisis regulations, they have lower leverage levels and lower risk to achieving a healthy across the cycle return on tangible equity

- They continue to maintain the deposit base that give it a low cost advantage despite the scandal. The customers that remain have shown us that Wells Fargo is crucial to them or they are too lazy to change: these are great customers to have!

- They are mapping out every single process of the company in order to "fix" the issues for regulators:  This will be a tremendous asset to automating many functions previously conducted by human beings and I expect this to support massive headcount reduction during the next five years.  In my mind, there is no job more at risk of automation than bank tellers...

- The cross-selling scandal has created excellent incentives for the company to spend substantial sums on technology that will help to catch the bank up with JPM and BAC. I believe cross-selling is essential to success in the business model, but they need to have the right technology, automation, and incentives place to avoid wrongdoing.

- Management has incentives to talk down the outlook because politicians get irrationally upset about profitability. The market also seems overly focused on near-term NIM outlook as a factor in the valuation of the company.

- Due to the current asset cap, although Wells Fargo's top-line growth is restricted, there are signs they are choosing to instead de-risk the balance sheet much more than other banks heading into the next recession and can more aggressively expand in a much more favorable portion of the cycle when others are hurting.

- I expect the board to hire a CEO in the next 2-4 months who primarily spends their time as cheerleader in chief for a new culture at Wells Fargo and drive success for many years to come. I don't see why the situation is unfixable for them.

- I have confidence in management team's capital allocation abilities.  I also like the business mix compared to peers.

- It's a super boring story and many will say that it's better to pursue higher return ideas or hold cash and deploy at a more favorable time in the cycle. At these prices and with the continued buybacks, I don't feel the need to bottom-tick the purchase.

[vince]

The interim CEO has to be defensive, he can’t make commitments on behalf of the new CEO. I ams Ort of Ok with the asset cap. It certainly prevents them from doing something stupid late in the cycle and thy can buy back shares quite cheaply. Organic reinvestment is preferable, but I am not sure it’s a great idea to put the foot on the gas now. if they can continue to pay an almost 4% dividend and buy back 6% of their outstanding shares this year as well and remain overcapitalized, I am quite happy.

 

(Edited for typo)

 

This sums it up perfectly.  If you are patient you will most certainly extract a good return here.  If you are dying for the stock to re rate then you are probably misunderstanding the investment case.

[Dynamic]

Welcome, @Eatfitinvestgolf. Interesting post. Like you I have a fair bit of look through exposure to WFC via Berkshire Hathaway and I owned about a 4% direct holding until early 2018 when I switched the position into more Berkshire. I now hold a position in BAC, which again adds to a look through stake via Berkshire.

 

I think the period of penance could drag out a bit, but hopefully someone who understands misincentives will come in to lead the bank, clear up the old problems and appease regulators.

 

I do have some concerns that there may be some more bad news still to emerge and right now I think I have enough indirect exposure thanks to my enormous Berkshire position. Berkshire may offer slightly lower returns over the next cycle but is also far more diversified with probably somewhat lower downside risk to act as the bedrock of my portfolio and provide liquidity for when my next high conviction deeply undervalued opportunity arrives that might let me double a substantial portion of my capital in a couple of years.

[Guest eatliftinvestgolf]

https://www.reuters.com/article/us-wells-fargo-ceo-exclusive/exclusive-wells-fargo-taps-headhunter-spencer-stuart-to-find-new-ceo-sources-idUSKCN1S21RY

 

some comments on the search for WFC CEO;  Spencer Stuart has been retained.  Reportedly focused on female candidates.

[Guest eatliftinvestgolf]

Munger reiterates Buffett/Munger preference for main street banking experience.  Trashes prior CEOs a bit and complements Tim Sloan as a conservative lender.

 

https://www.wsj.com/articles/charlie-munger-doesnt-want-wall-street-making-the-damn-decisions-at-wells-fargo-11556810465

[sleepydragon]

 

 

https://www.wsj.com/articles/bridgewater-co-ceo-eileen-murray-weighs-leaving-worlds-largest-hedge-fund-11557154633

 

“Ms. Murray was recently contacted by representatives of Wells Fargo & Co. about the bank’s open CEO role, people familiar with the matter said. Wells Fargo representatives also called people close to Ms. Murray as part of that process. Ms. Murray subsequently tipped off the job possibility to others at Bridgewater, these people said.

 

Wells Fargo is one of a series of companies that Ms. Murray has discussed potential roles with in recent years, people familiar said. She also interviewed several times with Uber Technologies Inc. for a high-level job around the time the

“

[sleepydragon]

 

 

https://www.wsj.com/articles/bridgewater-co-ceo-eileen-murray-weighs-leaving-worlds-largest-hedge-fund-11557154633

 

“Ms. Murray was recently contacted by representatives of Wells Fargo & Co. about the bank’s open CEO role, people familiar with the matter said. Wells Fargo representatives also called people close to Ms. Murray as part of that process. Ms. Murray subsequently tipped off the job possibility to others at Bridgewater, these people said.

 

Wells Fargo is one of a series of companies that Ms. Murray has discussed potential roles with in recent years, people familiar said. She also interviewed several times with Uber Technologies Inc. for a high-level job around the time the

“

 

What the board is thinking. I don’t think she will be a good fit. No experience making loans at all. Might be good fit for dealing with politicians though as bridgewater is very good at this.

[mwtorock]

 

 

https://www.wsj.com/articles/bridgewater-co-ceo-eileen-murray-weighs-leaving-worlds-largest-hedge-fund-11557154633

 

“Ms. Murray was recently contacted by representatives of Wells Fargo & Co. about the bank’s open CEO role, people familiar with the matter said. Wells Fargo representatives also called people close to Ms. Murray as part of that process. Ms. Murray subsequently tipped off the job possibility to others at Bridgewater, these people said.

 

Wells Fargo is one of a series of companies that Ms. Murray has discussed potential roles with in recent years, people familiar said. She also interviewed several times with Uber Technologies Inc. for a high-level job around the time the

“

 

What the board is thinking. I don’t think she will be a good fit. No experience making loans at all. Might be good fit for dealing with politicians though as bridgewater is very good at this.

 

I guess at this point of time, they probably just want someone that can deal with politicians.

[sleepydragon]

According to the CNBC interview, Buffett suggested a couple names to WFC chairman a few days ago.

Keeping my hope high that they get someone good.

[sleepydragon]

 

 

https://www.wsj.com/articles/bridgewater-co-ceo-eileen-murray-weighs-leaving-worlds-largest-hedge-fund-11557154633

 

“Ms. Murray was recently contacted by representatives of Wells Fargo & Co. about the bank’s open CEO role, people familiar with the matter said. Wells Fargo representatives also called people close to Ms. Murray as part of that process. Ms. Murray subsequently tipped off the job possibility to others at Bridgewater, these people said.

 

Wells Fargo is one of a series of companies that Ms. Murray has discussed potential roles with in recent years, people familiar said. She also interviewed several times with Uber Technologies Inc. for a high-level job around the time the

“

 

What the board is thinking. I don’t think she will be a good fit. No experience making loans at all. Might be good fit for dealing with politicians though as bridgewater is very good at this.

 

I asked a friend of mine who used to work at Bridgewater. My friend spoke highly of Ms. Murray - calling her a very effective problem solver. She would come to meetings , no bullshitting like others, always get to the points immediately and solve problems quickly,  and she is a good listener.

[Guest eatliftinvestgolf]

https://www.americanbanker.com/news/wells-fargo-creates-unit-to-satisfy-regulatory-demands

 

Wells Fargo has created an operations unit designed to focus exclusively on meeting demands of regulators who have expressed dissatisfaction with the bank's progress after a series of scandals.

 

Derek Flowers, the bank's chief credit and market risk officer, will lead the newly formed strategic execution and operations group, acting CEO C. Allen Parker said in an internal memo issued Wednesday. Flowers, a 21-year veteran of Wells Fargo, currently oversees all credit risk throughout the bank's lending activities and provides oversight of all company and line-of-business credit policies.

[coc]

For those struggling with the basic math on WFC's valuation post asset cap, here is a simple way to consider it: If WFC can grow at the aforementioned 4% per annum for a long time ahead (seems a reasonable figure to me), they would need to retain roughly 1/4 of the earnings to do if they can earn 15-16% on tangible equity. That leaves 75% distributable (again, over time, it's higher currently).

 

What's a company worth that can distribute 75% of their earnings and grow at 4%? If you pick a fair return is 10%, you'd capitalize its distributable free cash flow at 10%-4% = 6%. So if they have $5 of earning power per share, that's $3.75 of distributable cash flow, capitalized at 6% = $62.50/share. If you figure there is some excess capital on top of that, say it's $10 billion or ~$2.50/share, WFC would have a rough intrinsic value of $65.

 

You can play with the numbers as you see fit, factor in buybacks at current prices etc., but that is a helpful place to start, at least.

[Guest Schwab711]

How does WFC grow 4% without increasing assets? By necessity, it means ROA must increase (and operating expenses must remain flat or ROA must increase fast enough to accommodate increasing operating expenses as well). We know wages are increasing and NIM is decreasing. The longer the asset cap remains the harder it's going to be to grow post-cap removal since relationships are slowly lost to competition.

[dutchman]

in the latest filing buffett sold some.

Is this because of the cap because it doesn't seem

like he's up at the limit.

[sleepydragon]

in the latest filing buffett sold some.

Is this because of the cap because it doesn't seem

like he's up at the limit.

 

I think he is selling due to cap.

In fact, I think he is forced to buy JPM and BK because he is forced to sell WFC. It seems the dollar notional are very close.

 

How many stocks out there that Warren likes but he is forced to sell?

[sleepydragon]

For those struggling with the basic math on WFC's valuation post asset cap, here is a simple way to consider it: If WFC can grow at the aforementioned 4% per annum for a long time ahead (seems a reasonable figure to me), they would need to retain roughly 1/4 of the earnings to do if they can earn 15-16% on tangible equity. That leaves 75% distributable (again, over time, it's higher currently).

 

What's a company worth that can distribute 75% of their earnings and grow at 4%? If you pick a fair return is 10%, you'd capitalize its distributable free cash flow at 10%-4% = 6%. So if they have $5 of earning power per share, that's $3.75 of distributable cash flow, capitalized at 6% = $62.50/share. If you figure there is some excess capital on top of that, say it's $10 billion or ~$2.50/share, WFC would have a rough intrinsic value of $65.

 

You can play with the numbers as you see fit, factor in buybacks at current prices etc., but that is a helpful place to start, at least.

 

I think you are right on. Banks are interesting because they can easily reinvest their retained earning at the same rate — as much as they could subject to regulatory approval. At 15% ROE that’s very very good.

Asset cap will soon be removed. It’s not hard to fix things when the problem has been identified and rules written out.

Ultimately the fate of any banks is determined by its credit decisions on its loans.