WFC - Wells Fargo

[Spekulatius]

The asset cap would be one contributing factor for turning away business.

It was imposed after the fraud was made public in 2016, not before.

 

Yes, the asset cap is likely a contributing factor of turning business away. I also agree that a lower rate is an I incentive for the customer change the bank. And, but think about it from WFC‘s perspective - how likely is a customer who leaves his bank to get 1/8% (to make a number up) lower interest rate on his mortgage is going to be in the future?

 

Those are probably the customers that you don’t want if you are a bank, especially if you are capital constraint to begin with.

[DooDiligence]

The asset cap would be one contributing factor for turning away business.

It was imposed after the fraud was made public in 2016, not before.

 

Yes, the asset cap is likely a contributing factor of turning business away. I also agree that a lower rate is an I incentive for the customer change the bank. And, but think about it from WFC‘s perspective - how likely is a customer who leaves his bank to get 1/8% (to make a number up) lower interest rate on his mortgage is going to be in the future?

 

Those are probably the customers that you don’t want if you are a bank, especially if you are capital constraint to begin with.

 

I agree. If Scarf & Company can improve the culture of compliance & at the same time reduce balance sheet risk, they would be well positioned if & when the industry & interest rate environment mean reverts. It's anyones guess as to how long it will take for business conditions to improve & markets will probably swing this thing wildly until that happens. There's likely plenty of time for observers to watch the developments in the industry for more clarity, and still be able to take advantage of what appears to be bargain basement pricing. IOW, this ain't bottomed yet.

 

Catalysts for rerating by market participants are obvious. Expense reduction from closing branches, etc., solid evidence of loan portfolio quality and the eventual asset cap removal.

 

Contra catalysts are equally obvious, deteriorating balance sheet, NIM compression, another scandal & a never ending ass spanking by regulators & legislators.

 

In case you couldn't tell, I'm reading the Acquirers Multiple & using it to justify holding on to WFC.

 

Thanks also (I think) to Nate Tobik for his book The Bank Investors Handbook for helping me understand the moving parts.

[erdospi]

The asset cap would be one contributing factor for turning away business.

It was imposed after the fraud was made public in 2016, not before.

 

Yes, the asset cap is likely a contributing factor of turning business away. I also agree that a lower rate is an I incentive for the customer change the bank. And, but think about it from WFC‘s perspective - how likely is a customer who leaves his bank to get 1/8% (to make a number up) lower interest rate on his mortgage is going to be in the future?

 

Those are probably the customers that you don’t want if you are a bank, especially if you are capital constraint to begin with.

 

I agree. If Scarf & Company can improve the culture of compliance & at the same time reduce balance sheet risk, they would be well positioned if & when the industry & interest rate environment mean reverts. It's anyones guess as to how long it will take for business conditions to improve & markets will probably swing this thing wildly until that happens. There's likely plenty of time for observers to watch the developments in the industry for more clarity, and still be able to take advantage of what appears to be bargain basement pricing. IOW, this ain't bottomed yet.

 

Catalysts for rerating by market participants are obvious. Expense reduction from closing branches, etc., solid evidence of loan portfolio quality and the eventual asset cap removal.

 

Contra catalysts are equally obvious, deteriorating balance sheet, NIM compression, another scandal & a never ending ass spanking by regulators & legislators.

 

In case you couldn't tell, I'm reading the Acquirers Multiple & using it to justify holding on to WFC.

 

Thanks also (I think) to Nate Tobik for his book The Bank Investors Handbook for helping me understand the moving parts.

 

Aren’t they just cutting to fight the NIM compression at this point? And one is hoping to win that race?

[DooDiligence]

The asset cap would be one contributing factor for turning away business.

It was imposed after the fraud was made public in 2016, not before.

 

Yes, the asset cap is likely a contributing factor of turning business away. I also agree that a lower rate is an I incentive for the customer change the bank. And, but think about it from WFC‘s perspective - how likely is a customer who leaves his bank to get 1/8% (to make a number up) lower interest rate on his mortgage is going to be in the future?

 

Those are probably the customers that you don’t want if you are a bank, especially if you are capital constraint to begin with.

 

I agree. If Scarf & Company can improve the culture of compliance & at the same time reduce balance sheet risk, they would be well positioned if & when the industry & interest rate environment mean reverts. It's anyones guess as to how long it will take for business conditions to improve & markets will probably swing this thing wildly until that happens. There's likely plenty of time for observers to watch the developments in the industry for more clarity, and still be able to take advantage of what appears to be bargain basement pricing. IOW, this ain't bottomed yet.

 

Catalysts for rerating by market participants are obvious. Expense reduction from closing branches, etc., solid evidence of loan portfolio quality and the eventual asset cap removal.

 

Contra catalysts are equally obvious, deteriorating balance sheet, NIM compression, another scandal & a never ending ass spanking by regulators & legislators.

 

In case you couldn't tell, I'm reading the Acquirers Multiple & using it to justify holding on to WFC.

 

Thanks also (I think) to Nate Tobik for his book The Bank Investors Handbook for helping me understand the moving parts.

 

Aren’t they just cutting to fight the NIM compression at this point? And one is hoping to win that race?

 

That plus cherry picking loans to improve asset quality.

[Guest cherzeca]

wonder if there is right of set off, so that if loan defaults wfc gets to grab the investment account...

[Foreign Tuffett]

Let's revisit our estimates we made two weeks ago for the dividend cut:

 

Me - "maybe they will cut it in half to $0.25 per Q?"

 

gary17 - "same dividend yield as BAC"

 

FCharlie - to $0.15 or $0.20 per Q, but "they probably don't have to cut this much"

 

Parsad - No explicit guess, but "It's priced in"

 

Not exactly Nostradamus-like powers of prediction.* We were all overly optimistic. Maybe WFC's new management team is just being overly conservative. Maybe management is putting up the "things are bad" bat-signal for anyone who cares to look.

 

 

* Although in my defense I did post some bearish thots on WFC on March 27th (page 134)

 

 

[blainehodder]

I imagine they are proceeding with extreme caution so that a) They don't need a to follow a cut with another cut in case the depth and duration of the economic crash are worse than they already think, and b) Buy some risk management credibility from the Fed for the asset cap.

[nspo]

I have a limit order in at around $20. The way I see it, and I could be wrong, I'm anticipating (ROUGHLY) 3 quarters of $.10 or $.30 and a reinstatement of $.51 dividend in a full year from now. Total of $.81. Considering historic div yield of 2.5% gets me to $30+ a share a year out. After a reinstatement back to a more normal div of $.51, tremendous value is created with fairly reasonable assumptions IMO. Positive optionality: Asset cap lift due to economic goodwill during covid, de-risking from new management team etc. (everything everyone is aware of)

[sleepydragon]

The congress and the Fed need to give WFC a break and let them make some money, otherwise expect large layoffs and losing a lot of votes from employees and stakeholders of WFC

[Foreign Tuffett]

The congress and the Fed need to give WFC a break and let them make some money, otherwise expect large layoffs and losing a lot of votes from employees and stakeholders of WFC

 

Large layoffs are a big part of the bull case, and all are but inevitable (although the timing has been difficult to pin down).

[sundin]

Does nobody want to touch it? Ameritrade said WFC was one of the most popular stocks in June. I don't know what that means exactly, but it was one of the ten stocks mentioned by Ameritrade. Robinhood owners of WFC have risen from 20,000 to near 100,000 in the last few months. COBF board members are clearly buying it. WFC appears to be very popular! And yet the stock can't stop going down. What is going on? 

 

You make good points about historical ratios to book value but that is backward looking. Stock investors are forward looking. Right now the stock is saying that there is bad news out there that hasn't been released yet.

 

I don't think that that's a very good argument. That way you never buy anything or just become a momentum investor.

 

Every time you get a stock dropping you see these pronunciations about the all seeing eye of the market. When Apple went down to 160 or something at the end of 2018 I saw a lot of investors doing their "market knows best" routine instead of buying Apple at 7x earnings. With Apple now at 380, what exactly did the market know?

 

I agree - what exactly is priced in?

 

I do not think the div cut is priced in if it goes from $.51 to $.10. I also think the dividend cut could potentially be a positive catalyst given that the payout ratio would be significantly greater than 100% without one.

 

Post Covid, WFC likely has greater restructuring costs/severance compared to other banks, but is this a positive or negative to the price?

 

Based on Scharf's comments it seems these restructuring costs are coming fast; they are not going to wait until the end of pandemic.

[tng]

Does nobody want to touch it? Ameritrade said WFC was one of the most popular stocks in June. I don't know what that means exactly, but it was one of the ten stocks mentioned by Ameritrade. Robinhood owners of WFC have risen from 20,000 to near 100,000 in the last few months. COBF board members are clearly buying it. WFC appears to be very popular! And yet the stock can't stop going down. What is going on? 

 

You make good points about historical ratios to book value but that is backward looking. Stock investors are forward looking. Right now the stock is saying that there is bad news out there that hasn't been released yet.

 

I don't think that that's a very good argument. That way you never buy anything or just become a momentum investor.

 

Every time you get a stock dropping you see these pronunciations about the all seeing eye of the market. When Apple went down to 160 or something at the end of 2018 I saw a lot of investors doing their "market knows best" routine instead of buying Apple at 7x earnings. With Apple now at 380, what exactly did the market know?

 

I agree - what exactly is priced in?

 

I do not think the div cut is priced in if it goes from $.51 to $.10. I also think the dividend cut could potentially be a positive catalyst given that the payout ratio would be significantly greater than 100% without one.

 

Post Covid, WFC likely has greater restructuring costs/severance compared to other banks, but is this a positive or negative to the price?

 

Based on Scharf's comments it seems these restructuring costs are coming fast; they are not going to wait until the end of pandemic.

 

In some ways the pandemic gives them cover to layoff a bunch of employees. If the unemployment benefits get extended, it could work in the favor of the workers losing their jobs too. It'll be interesting to see what BAC's quarter looks like in comparison because that is probably the most comparable big bank, but BAC paid for their restructuring a few years ago.

[sleepydragon]

Anybody have any insights/speculation on why Munger hasn't sold WFC from the Daily Journal portfolio though Buffett has sold some?

[John Hjorth]

Speculation - for my part: Anchoring & confirmation bias.

 

Edit :

 

And those buying into this thing at these levels may actually end up with a very good return on the investment over some time. The key is that this is a bank [damn it!].

[villainx]

One thing about kitchen sink quarter, doesn't preclude another one. 

 

Though seems like folks are confident that there's a path to improvement.  Especially with the dividend cut out of the way.

[LC]

Though seems like folks are confident that there's a path to improvement.  Especially with the dividend cut out of the way.

Well, that's my fear. Cutting 4/5ths of the dividend is not a good sign. I don't think it has anything to do with "signalling" to the Fed. I think Scharf sees low profitability for a good while.

 

WFC is reflecting income inequality - less HNW customers, less trading activities...more modified mortgages and other consumer/consumer-driven loans.

[Parsad]

Let's revisit our estimates we made two weeks ago for the dividend cut:

 

Me - "maybe they will cut it in half to $0.25 per Q?"

 

gary17 - "same dividend yield as BAC"

 

FCharlie - to $0.15 or $0.20 per Q, but "they probably don't have to cut this much"

 

Parsad - No explicit guess, but "It's priced in"

 

Not exactly Nostradamus-like powers of prediction.* We were all overly optimistic. Maybe WFC's new management team is just being overly conservative. Maybe management is putting up the "things are bad" bat-signal for anyone who cares to look.

 

 

* Although in my defense I did post some bearish thots on WFC on March 27th (page 134)

 

They will be raising that dividend faster than you think.  I expected them to take a big hit this quarter, and I expect another hit, but slightly smaller, next quarter.  Things will start to normalize by 4th Q 2020, and I think the dividend/share buybacks will go back closer to normal 1st Q 2021. 

 

Their loss provisions this quarter were smack dab in the middle of JPM and C.  WFC doesn't have a robust trading business like those two...that's why I would like to see them merge with someone to add that part.  Even with these provisions, WFC, JPM and C increased their Tier 1 capital.  WFC isn't my favorite bank...BAC and TD are...but in terms of upside potential, I think WFC is one of the cheapest investments period, let alone a major bank.  Cheers!

[woodstove]

Quick arithmetic:  Assuming mgmt want to avoid another div cut, presumably they expect that bank will earn sufficient in Q3 and Q4 that total Q1-Q4-2020 earnings will be in excess of 0.40 -- else mandated further div cut, right?  Q1=0.01, Q2=-0.66, so Q3+Q4 anticipated to be 1.05??  Suggests normalized earning power of 0.52/qtr if ignore seasonality and past two qtrs of epidemic writedowns?

 

Disclosure: small long position in WFC, no in-depth bank expertise, just like the business and efforts they're making to go in a good direction.

[StubbleJumper]

Quick arithmetic:  Assuming mgmt want to avoid another div cut, presumably they expect that bank will earn sufficient in Q3 and Q4 that total Q1-Q4-2020 earnings will be in excess of 0.40 -- else mandated further div cut, right?  Q1=0.01, Q2=-0.66, so Q3+Q4 anticipated to be 1.05??  Suggests normalized earning power of 0.52/qtr if ignore seasonality and past two qtrs of epidemic writedowns?

 

Disclosure: small long position in WFC, no in-depth bank expertise, just like the business and efforts they're making to go in a good direction.

 

 

I think your logic is solid, but I would not call it "normalized" earning power.  The dividend was cut so drastically because mgt knew that they'll have a couple of kitchen-sink quarters and the fed has reserved the option to reassess the banks' capital plans if it wishes.  So, rather than two cuts in rapid succession, it looks like WFC is making one large, likely temporary, cut.

 

 

SJ

[Shane]

Curious what board members might think of this criticism: by bringing in outsiders to right the ship, Wells Fargo is committing a common turnaround mistake.  I believe it was the book "How the Mighty Fall" or "Good to Great" by Jim Collins (I can't recall) where it was found that the successful turnaround usually had brought people from within up to fix the company.  Perhaps the idea is that if the corporate culture is so weak that there is nobody from inside who can satisfy the position and right the ship, that the job is too momentous to have a high probability of success.

 

Thoughts?

[StubbleJumper]

Curious what board members might think of this criticism: by bringing in outsiders to right the ship, Wells Fargo is committing a common turnaround mistake.  I believe it was the book "How the Mighty Fall" or "Good to Great" by Jim Collins (I can't recall) where it was found that the successful turnaround usually had brought people from within up to fix the company.  Perhaps the idea is that if the corporate culture is so weak that there is nobody from inside who can satisfy the position and right the ship, that the job is too momentous to have a high probability of success.

 

Thoughts?

 

 

I would suggest that bringing in an outsider wasn't really WFC's choice.  The government basically chased Stumpf out of town, and he was replaced internally by Sloan who was also subsequently chased out of town by Elizabeth Warren.  Scharf is choice #3, and maybe the fact that he didn't come up from within will prevent Warren from chasing him out of town too.

 

In all of this, the Fed and congress likely had the honourable intention of "fixing" Wells, but I tend to agree with you that an outsider is likely not as well positioned.  We probably would have been better off if Sloan had been given more rope, but that's not how things went.

 

 

SJ

[rb]

Yeah, but Sloane didn't really do himself any favours did he?

[CorpRaider]

Yeah, he has already brought in a ton of high level managers from his JPM connections, either directly or after they made another move.  Will be interesting to watch.  If he starts talking about changing the business mix and replicating the set up at JPM and C (and to a lesser extent BAC), or for pete's sake buying an investment bank; I will be looking to bounce post haste.  From what I gather from his remarks he's not talking about anything too radical. 

 

I'm not too worried about getting a perhaps mythical/narrative invention "turnaround manager", because I think it is a business that has stood (and can stand) some mismanagement; basically growing deposits and maintaining dominant shares in mortgage, small business, and middle market lending with either no one at the helm or people who were hatching elaborate plans to bring leverage to bear on their regulators and writing about it in emails copying members of the board of directors.

[Junto]

Curious what board members might think of this criticism: by bringing in outsiders to right the ship, Wells Fargo is committing a common turnaround mistake.  I believe it was the book "How the Mighty Fall" or "Good to Great" by Jim Collins (I can't recall) where it was found that the successful turnaround usually had brought people from within up to fix the company.  Perhaps the idea is that if the corporate culture is so weak that there is nobody from inside who can satisfy the position and right the ship, that the job is too momentous to have a high probability of success.

 

Thoughts?

 

As a banker who has successfully turned around a bank and lived through a failed one,  I strongly believe in banking that outsiders are needed to shift the dynamic in a struggling banking organization. Maybe it is anchoring in prior views or truly mismanagement, an outside view and structure can bring failing strategies to light, institute new ones, and investing in strong strategies. The independence of prior problems and troubles allows for more flexible and new approaches to work through the major rocks needed to improve the company.

 

We will see how this turnaround progresses. I have no position in WFC but think it is trading cheap, but I am not convinced yet that they have a firm grasp on the problem and have presented a viable plan to solve given the regulatory challenges faced.

[EricSchleien]

Curious what board members might think of this criticism: by bringing in outsiders to right the ship, Wells Fargo is committing a common turnaround mistake.  I believe it was the book "How the Mighty Fall" or "Good to Great" by Jim Collins (I can't recall) where it was found that the successful turnaround usually had brought people from within up to fix the company.  Perhaps the idea is that if the corporate culture is so weak that there is nobody from inside who can satisfy the position and right the ship, that the job is too momentous to have a high probability of success.

 

Thoughts?

 

 

 

 

As a banker who has successfully turned around a bank and lived through a failed one,  I strongly believe in banking that outsiders are needed to shift the dynamic in a struggling banking organization. Maybe it is anchoring in prior views or truly mismanagement, an outside view and structure can bring failing strategies to light, institute new ones, and investing in strong strategies. The independence of prior problems and troubles allows for more flexible and new approaches to work through the major rocks needed to improve the company.

 

We will see how this turnaround progresses. I have no position in WFC but think it is trading cheap, but I am not convinced yet that they have a firm grasp on the problem and have presented a viable plan to solve given the regulatory challenges faced.

 

 

As someone who has been working with people and companies with Tribal Leadership now for almost 8 years, I can tell you that most failing strategies are a function of a culture not aligned with the strategies. Most consultants just do change management without any actual transformation and ontological work involved which is where the culture shift happens. Without ever having been in the company, I'd be 99% it's a culture issue and if the culture shifted, new strategies would be created naturally as a byproduct of that.

 

...this is the last bastion of low-hanging fruit alpha IMO outside of super tiny net-nets which will always have an advantage due to limits of position sizing.

 

The truth is I could with maybe 3 other people come in and make more of an impact in Wells Fargo in 1 month than they have in the last few years.

 

The level of amateur hour is funny but also kind of sad. When I work with people, they assume I'm just another consultant and then their world gets rocked within 1-2 days.