WFC - Wells Fargo

[changegonnacome]

1 hour ago, ERICOPOLY said:

USB is more of a vanilla comparison.  USB also sits today where it did in early 2020 before the pandemic.

Enjoy the back and forth Ericopoly......helps with my comfort level around holding WFC

Three reasons for you:

(1) the asset caps matter more now for WFC than it did then

(2) WFC's relative inefficiency/digitization deficit matters more now than it did in a rising NIM world of early 2020

(3) Political atmosphere - democratic White House/Congress that is turning out much further left/populist than people had envisioned and has possibly changed the markets expectations around the timeline for the asset cap being lifted

Expanding on the above - the asset cap always mattered but it matters MORE now in the post-pandemic & lower for longer world were in than it did in the full employment, expectations of rising rates of late 2019/early 2020..........all the banks you mentioned pre-pandemic (incl. WFC) had the probable future ahead of letting rising return on assets lift their respective net incomes vs. growing assets...........now what the other banks are losing on margin (ROA) they have the option to make it up by increasing assets / volume (if they wish). This lever isn't available to WFC. So if you wanted to isolate for XYZ reason why Jan 2020 pricing isn't a good 'target' for WFC relative to other banks it might be this. The other reason possibly is that in this lower for longer world, married to the asset cap the efficiency ratio of a bank matters more than it did in early 2020 again where ROA's were rising not falling.....what you cant make up for in pricing/volume you make up for in cost...............JPM/BAC/USB are further along in their digitization journeys so have more optionality in reducing cost/closing branches, expanding digital journeys for customers..........WFC is relative laggard here as Shcarf admits and is only beginning the road to extract $10bn of cost & genuinely digitize the business to bring its ratio's in line with JPM/BAC but also to give it the flexibility now afforded to JPM/BAC to optimize cost.

 

Edited April 20, 2021 by changegonnacome

[ERICOPOLY]

At $44 today, WFC is trading at a $9 discount to early 2020's valuation.  That's equivalent to the discount they should get for earning $2 less per year for the next 4.5 years.  Or $1 less per year for 9 years. (ignoring present value of money arguments which only make the discount even weirder).

We're coming out of a pandemic, not going into one!  Reserves are being released, not built.  Now is not the time to be putting large discounts on the stock (IMO).  California's governor has said he'll look at fully reopening the state's economy by mid-June (less than two months away), paving the way for other liberal states to follow if they don't first lead.

At some point a $9 discount in the stock needs to answer to the following question:  FOR WHAT MATHEMATICAL REASON?

 

 

 

 

 

 

 

 

[changegonnacome]

Hope your right  @ERICOPOLY

Best if we both end up right and asset cap is lifted asap AND Scharf sprinkles a couple of billion $ of some genuine cost savings on the street AND yield curve steepens AND multiples expand to bring financials back into their historical PE discount to wider S&P

All of the above remind why I liked WFC back in mid-2020.......lots of potential catalysts and thats still true today

[ERICOPOLY]

More than a year ago it was said on this board (and by a hysterical poster) that this was "an extinction level event".

 

[Broeb22]

FWIW, anecdotally, I met someone this week who works for Wells in Charlotte in their AML/Financial Crimes unit. His comments about the quality of worker there made me feel comfortable that the fat there is real and will not impact the bank's performance. Having worked at other large banks in risk management, the laziness exists everywhere, but Wells probably has more than others because they didn't go through the same belt-tightening that others did years ago. 

[ERICOPOLY]

7 minutes ago, Broeb22 said:

FWIW, anecdotally, I met someone this week who works for Wells in Charlotte in their AML/Financial Crimes unit. His comments about the quality of worker there made me feel comfortable that the fat there is real and will not impact the bank's performance. Having worked at other large banks in risk management, the laziness exists everywhere, but Wells probably has more than others because they didn't go through the same belt-tightening that others did years ago. 

 

When you say "but Wells probably has more than others", are you saying they have more laziness or more fat?

 

When you say "His comments about the quality of worker there made me feel comfortable that the fat there is real and will not impact the bank's performance.", are you saying that real fat workers do not affect the bank's performance?  Lol.  I'm kidding, but I still don't know what you are trying to say.

 

 

 

 

[Broeb22]

He was basically saying that he feels like there are a lot of overpaid, lazy people in his department, so they could cut some of those people and not lose anything in terms of quality of work done. 

It gave me incrementally more confidence in the $10 billion that Charlie has discussed as an expense reduction target. 

He also spoke about their plans to reduce real estate costs (I'm sure much of this is public knowledge). Wells apparently has bases in SF, Charlotte, Minneapolis, somewhere in Florida, and probably elsewhere, and this guy says they plan to consolidate it, and he thinks they will be an East Coast-based bank before its all said and done. 

[LC]

All banks have fat. WFC has more than the rest, and it has been this way for a LONG time. 

I'm just saying cost reductions shouldn't be the sole driver of your investment thesis.

[Broeb22]

4 hours ago, LC said:

All banks have fat. WFC has more than the rest, and it has been this way for a LONG time. 

I'm just saying cost reductions shouldn't be the sole driver of your investment thesis.

I’m not sure if you’re referring to my comments, but no, cost reductions are not the sole driver to my investment thesis. 

[LC]

No, I was referring generally, and also as a WFC shareholder it is not the crux of my investment either.

[CorpRaider]

FWIW. 

The ~$1 trillion of growing (despite any and all efforts to the contrary by former management, and the U.S. government), nearly-free, essentially perpetual, anti-fragile (thanks to the FDIC/GFC/grooming of the psychology of the populace over the last 100 years), deposit/float is the crux of my investment thesis.

Edited April 30, 2021 by CorpRaider

[wabuffo]

The problem for the Wells (and the Fed) is that Wells is under an asset cap at the worst possible time for a big bank.  The huge stimulus spending in 2020 (and 2021) by the US Treasury is causing a surge in bank deposits across the entire US commercial banking sector.  But it is really pronounced for the big banks.  Unfortunately, Wells has to shed deposits (and assets to stay under the cap) at a time when its raining deposits by the bucket-ful.

Wells got put under the cap in Fed 2018, IIRC.  Prior to the pandemic, Wells deposits stayed in-line with the other two big banks.   But then the pandemic happened, and the US Treasury brought out the stimmie check bazooka (among many other spending programs), and deposits surged at the big banks.  But not as much at Wells as it is now losing deposit share in the US.  If anything that will continue in 2021 because Q1 was another huge surge in US bank deposits.  If there's more stimulus after that (and it looks likely), Wells will fall further behind (unless the cap is lifted).

I mean in Q4, 2020  Citigroup's deposits were also growing in line with the big banks like JPM and BAC.  If 2021 is another big year, then Citi could pass Wells in deposits.   LOL - Citi!  Remember during the GFC, when FDIC Chair Bair tried to steer Wachovia into the hands of Citi because she was worried that Citi needed more deposits before WFC swooped to snatch it from the Chair Bair's grasp.  Now Citi is poised to become the third biggest bank in the US in terms of deposits by the end of 2021.

I don't know what it means competitively for WFC to lose so much US bank deposit share - but its huge drop relative to its peers.  At the end of Q1 2018, total US commercial banking industry deposits were $12t, so WFC had an 11.4% "market share".   By the end of 2020, total industry deposits had grown to $16.3t, and thus, WFC's share had fallen to 9.2%   That's stunning because the US banking industry has been consolidating deposit share among the big banks.  Another year like 2020, and WFC could fall to 7%-ish share.   Meanwhile, JPM during the same timeframe has gone from 13% to 14% and will probably hit 15% by the end of 2021.

I've heard a few WFC bulls say well those deposits are temporary because people aren't spending due to the pandemic.  But it doesn't work that way.  US Treasury deficit spending creates NEW bank deposits.  Spending just moves the deposits around the banking system but never removes them.  Only Federal taxes do that.

wabuffo

Edited April 30, 2021 by wabuffo

[CorpRaider]

I agree it has been a constraint but the upside is they've been forced to high-grade the liabilities and assets.  They could have taken more share from the smaller banks like the other big guys did, but I think this is probably a decade + trend and they did get to feast like basically no other  bank through the GFC and who knows what kind of loans they would have booked running up to covid if they weren't constrained (I guess any loan was a good loan with gov't support, so far...).  

I've only glanced at Citi and JPM (I only own BK, WFC, BAC, and USB; oh and TD and Westpac in Australia) but Wells' deposit base has been tilted even more heavily to traditionally lower cost and stickier sources through this period. 

Hopefully, the asset cap comes off within the next year.  I'm sure they can target the coming massive cost reductions by congressional district if needed.  I am also hoping they can release a lot more in reserves per share while we wait.

Edited April 30, 2021 by CorpRaider

[wabuffo]

I agree it has been a constraint but the upside is they've been forced to high-grade the liabilities and assets. 

The asset side has been squeezed by the forced growth of deposits at the Fed earning zero.  Wells has been forced to shed assets earning low-digit rates to make room for $100b in deposits at the Fed earning zero during 2020 since total assets have to stay flat.   Few people understand this.  Plus more deposits at the Fed are coming in 2021 - probably another $100b.

I think there's just pain everywhere at Wells. 

wabuffo

Edited April 30, 2021 by wabuffo

[CorpRaider]

Yeah I was never sure I followed your analysis on that stuff (but I decided it didn't matter in the time frame for my investment so I put down the pencil).  I thought the way the CFO explained it as costing them big time foregone earnings on the $$$ they could be lending or investing but instead is sitting (off their balance sheet) at the fed, but you're saying they get  additional deposits they have to hold them in cash and equivalents and then that crowds out earning assets?  I will go back and read your posts again.   

 

Edited April 30, 2021 by CorpRaider

[wabuffo]

CorpRaider - while my analysis of Wells Fargo has been bearish due to what's been happening in the environment around them - it doesn't seem to have affected the stock price.   So it could be that they are managing the effects better than I had thought they would.

wabuffo

 

[CorpRaider]

Oh yeah, I wasn't trying to "stock price bro" you.  I just was never sure I followed your analysis of how the asset side was impacted and the federal reserve deposit dynamics. 

So you're saying, for example, if they (via clients) get another $100B in stimmy deposits next year and the asset cap isn't lifted they have to put that with the fed and that goes into their cash and equivalents on the b/s and they will have to sell other assets to stay below $1.95T? 

I thought Shrewsberry got a question about forced asset sales due to asset cap constraints and I understood him to explain that they can't loan out or invest it funds on deposit due to the cap so they deposit it with the fed and thus earn nothing, so they are foregoing ~$2 bill per anum in interest income, most of this revenue would fall right to the bottom line (a very costly penalty for sure, but almost all of that is the problem of the guy from whom I bought the stock right now).  I also get that they incur some expenses for receiving and holding those liabilities (deposits from their clients), but their cost was .03% last quarter, so that's ok with me.

Edited April 30, 2021 by CorpRaider

[wabuffo]

CorpRaider - its actually pretty simple (but the pundits over-complicate it).

Just follow the debits and credits...

Let's say the US Treasury sends $10b of stimmie deposits to folks who bank at Wells Fargo.

FED:   The US Treasury tells the Fed to move $10b from its general account at the Fed to Wells' account at the Fed.

• Fed liability (US Treasury general account) decreases by $10b
• Fed liability (Wells Fargo reserve account) increases by $10b

WFC:  Wells Fargo receives the $10b in stimmie deposits in each of its customers' deposit accounts:

• WFC asset (Wells reserve account) increases by $10b
• WFC liability (Wells customer deposits) increases by $10b

Note that Step 2 is both an increase in assets and liabilities for WFC.  But since its under an asset cap, it must now shed both $10b in assets and $10b in liabilities.  Other banks' assets and liabilities grow and they don't have to do anything.

wabuffo

[CorpRaider]

Ok yeah, I follow.  I misunderstood Shrewsberry to explain that the reserve account with the fed (asset in your scenario) didn't count against the cap, but just screwed them out of income they could otherwise be earning by investing or loaning the new $10B in funds (and totally defeating the entire purpose of the fed/treasury exercise from a national economic perspective, as you mentioned).  I think their response has been to have to high-grade deposits (i.e., paying less, charging fees, etc. and letting "hotter" deposits run off...can't do that forever.).

Maybe they should do a global sale leaseback of all real estate (they kind of did that with the asset management bidness from what I can tell, (retained some equity and ability to squeeze the nuts off via control of the distribution, i.e. most of the economic upside without having to use their balance sheet).

Edited May 1, 2021 by CorpRaider

[ERICOPOLY]

4 hours ago, wabuffo said:

Spending just moves the deposits around the banking system but never removes them.  Only Federal taxes do that.

wabuffo

This point you make is an interesting one for those who fear that an increase in taxes would slow the economy.  I'm wondering why that fear exists when we live during a time when those deposits weren't being lent out anyhow.  I could well understand the point if lending were to be choked off by the reduction of deposits but I fail to see that as a realistic fear.

[wabuffo]

This point you make is an interesting one for those who fear that an increase in taxes would slow the economy.  I'm wondering why that fear exists when we live during a time when those deposits weren't being lent out anyhow.  I could well understand the point if lending were to be choked off by the reduction of deposits but I fail to see that as a realistic fear.

A bank does not need deposits to lend.  The mere act of extending a loan, creates a deposit.  If a bank needs reserves to meet regulatory requirements, it can borrow them from other banks.   The idea that a bank must first gather deposits before it can lend is wrong.

Think of it in a simple way.  Let's say you have a line of credit with WFC - but its completely undrawn.  You then decide to draw $10k from it.   There you go!   WFC makes a loan to you of $10k - which then shows up as a deposit in your checking account also at WFC.   WFC has an asset ($10k loan to you) and a liability ($10k deposits in your checking acct).

Every bank loan is like that.  The bank lends you money for a new car, a mortgage, etc - that loan always shows up next as a deposit in your bank account.  You may move it, spend it, etc... but as far as the banking system in aggregate is concerned it has a new deposit.  That's because when you spend your loan proceeds the simultaneous deposit that was created for you goes to another bank as a deposit.   Thus, a new loan to you  creates new deposits for the banking system.

wabuffo

Edited April 30, 2021 by wabuffo

[meiroy]

"A bank does not need deposits to lend.  The mere act of extending a loan, creates a deposit.  If a bank needs reserves to meet regulatory requirements, it can borrow them from other banks.   The idea that a bank must first gather deposits before it can lend is wrong."

Isn't interbank landing more expensive and isn't there currently regulation that limits this dependency and encourages deposits?

 

"This point you make is an interesting one for those who fear that an increase in taxes would slow the economy.  I'm wondering why that fear exists "

 

Depending on which sectors of the economy are taxed and by how much it can indeed slow down specific sectors, likewise it can benefit specific sectors.  The keyword here is "it depends", and the reason there's general fear is that a lot of people treat it as an absolute truth regardless of the circumstances. 

Edited May 1, 2021 by meiroy

[ERICOPOLY]

23 hours ago, wabuffo said:

I don't know what it means competitively for WFC to lose so much US bank deposit share - but its huge drop relative to its peers.

wabuffo

I'm not sure either. 

What do people think of Charlie Munger's comments about WFC and also about having only a few eggs in his basket and watching it closely?  Charlie once said (more than 10 years ago) that if he was going to put all of his net worth into one stock it would be WFC?  Cross-selling at WFC of course had been no secret in the years before the scandal broke and Charlie surely must have known about it.  After the scandal broke and in the ensuring years he has sold nothing whereas Warren finally walked after a few more years of thinking about it post-scandal.

I am fearful of asking the following question lest somebody (or a pig pile of people jump all over me):  Does Charlie have any trouble admitting mistakes or self-criticism?  He has criticized management on the one hand, yet he knew about their incentives program and decided that, of all stocks in the world, this is the one that he would put all of his money into.   His judgement about cross-selling was surely the same as managements.  Neither of them thought the scandal was a remote possibility before it occurred, despite all his knowledge of psychology and incentives.  Something blocked him from connecting the dots.

I know all about Charlie's track record.  And maybe he has torn himself a new one the size of the one that he tore for WFC's prior management, but I missed the reporting on that if it happened.

 

 

Edited May 1, 2021 by ERICOPOLY

[wabuffo]

After the scandal broke and in the ensuring years he has sold nothing whereas Warren finally walked after a few more years of thinking about it post-scandal.

I think cost basis had somewhat to a lot to do with who sold and who didn't.    Buffett was selling most of his WFC last year in the $20s.

BRK avg cost basis of WFC = $20.36 per share.

DJCO avg. cost basis of WFC =  ~$9.00 per share.

At this year's DJCO AGM, Munger even referred to the Daily Journal's low cost basis and the amount of taxes to be paid as a reason for holding rather than selling.

Quote

Q: ...why is Berkshire Hathaway selling shares of Wells Fargo as quickly as one can and the Daily Journal hasn't sold 1 share? If it's not good enough for Berkshire, shouldn't we have the same standards?

Munger: " Well, I don't think it's required that we be actually the same on everything. We have different tax considerations..."

 

wabuffo

Edited May 1, 2021 by wabuffo

[Rasputin]

de facto asset cap for the other trillionaire banks are incoming

From JPM Q1 transcript

". Perhaps the more interesting ratio right now is SLR which is at 5.5% excluding the temporary relief that just expired. As we’ve said all along, we were never going to rely on short-term temporary relief as a long-term planning matter, and this is evidenced by actions we've taken. We've already engaged with our Wholesale deposit clients to explore solutions and we issued $1.5 billion of preferred stock in the first quarter. Having said that, it's worth reinforcing a few points here. First, it's important to remember that the SLR is a leverage-based requirement, not a risk-based requirement. The growth in bank leverage has been driven by deposits and, therefore, cannot be cured by reducing lending. In fact, the opposite would be true. If we had more loan growth, it would help because it would absorb excess risk-based capital. The issue is that we've had muted loan demand to-date, and even if it starts to pick up, it's hard to envision that organic loan growth could keep pace with further QE. And therefore, we expect this leverage issue to persist for some time. And finally, when a bank is leverage constrained, this lowers the marginal value of any deposit regardless if it is wholesale or retail, operational or non-operational and regulators should consider whether requiring banks to hold additional capital for further deposit growth is the right outcome. As we told you last quarter, we have levers to manage SLR and we will..."

all the gloom and doom on WFC are priced in, less so now, but WFC still at about 25% discount vs BAC.

I track market cap/average earning assets among the trillionaires.  WFC at 0.107, BAC at 0.141, JPM at 0.148

At BAC equivalent of market cap/average earning assets, WFC should be roughly $60 per share.