WFC - Wells Fargo

[cmlber]

This ain't good

 

http://www.bloomberg.com/news/articles/2016-09-28/california-suspends-business-relationships-with-wells-fargo-itn9dfxw

 

 

Sure, it's not good.  But, turning to some school-boy arithmetic, what sort of underwriting profit might this cost WFC?  Suppose WFC would normally make 2.5% underwriting profit on let's say $100 billion of debt that California might need underwritten during a year.  That's like $2.5B, pre-tax, or about $0.40/share post-tax.  Both the 2.5% and the $100B are probably very generous, meaning the $0.40/sh is probably far too high.

 

 

SJ

 

Your math is very conservative.  The average fee underwriting muni bonds is 0.5%, 1/5 of your #.  California issues ~$70 billion/year in muni bonds.  If WFC gets all of those deals (and assuming they aren't well below average profitbailty, which I'm sure they are given the size of the borrower) and assuming there are no underwriting expenses, the earnings hit would be less than 1/10th your estimate.

 

I know you were intentionally being conservative, just pointing out how conservative...

[rb]

Guys, this isn't about just one specific event. What's not good is that they're not nipping this thing in the bud, clean the slate and push the reset button. As a consequence the hits keep on coming. Lat week we were talking about a 2 million hit to fees and maybe a 20 million lawsuit. This week we're talking maybe 250 mil pre tax and the hits keep on coming.  Just as I'm typing this note this hits Bloomberg:

 

http://www.bloomberg.com/news/articles/2016-09-29/wells-fargo-troubles-mount-with-penalty-for-soldiers-car-loans

[Picasso]

Guys, this isn't about just one specific event. What's not good is that they're not nipping this thing in the bud, clean the slate and push the reset button. As a consequence the hits keep on coming. Lat week we were talking about a 2 million hit to fees and maybe a 20 million lawsuit. This week we're talking maybe 250 mil pre tax and the hits keep on coming.  Just as I'm typing this note this hits Bloomberg:

 

http://www.bloomberg.com/news/articles/2016-09-29/wells-fargo-troubles-mount-with-penalty-for-soldiers-car-loans

 

I think the market/consumers/politicians just wants to see Stumff fired.  The longer Stumph stays on, the worse it's going to get.  If only there was someone who could call Stump to nudge him in the right direction...  Maybe then we'll get a "Stumf is out" rally and things will go back to business as usual.

[oddballstocks]

Guys, this isn't about just one specific event. What's not good is that they're not nipping this thing in the bud, clean the slate and push the reset button. As a consequence the hits keep on coming. Lat week we were talking about a 2 million hit to fees and maybe a 20 million lawsuit. This week we're talking maybe 250 mil pre tax and the hits keep on coming.  Just as I'm typing this note this hits Bloomberg:

 

http://www.bloomberg.com/news/articles/2016-09-29/wells-fargo-troubles-mount-with-penalty-for-soldiers-car-loans

 

The issue I pointed out earlier in this thread is one of controls.  This article points out the same, there are no or almost no controls in place for these things.  It said loan officers never checked military status.  This is something that ALL banks are required to do, they are required to keep track of this status.  I know banks that are a very small fraction of WFC's size that keep accurate track of this.

[KCLarkin]

If only there was someone who could call Stump to nudge him in the right direction...

 

When Buffett asked the fed to allow him to go past 10% ownership of WFC, the application stated:

 

Buffett’s company has no plans to merge Wells Fargo with another firm or to make any significant changes to its strategy or corporate structure, according to the application, which is dated June 14. Nor is Berkshire contemplating any changes to the San Francisco-based bank’s board, the company said.

 

I wonder whether this limits Buffett's role in this scandal.

[rb]

If only there was someone who could call Stump to nudge him in the right direction...

 

When Buffett asked the fed to allow him to go past 10% ownership of WFC, the application stated:

 

Buffett’s company has no plans to merge Wells Fargo with another firm or to make any significant changes to its strategy or corporate structure, according to the application, which is dated June 14. Nor is Berkshire contemplating any changes to the San Francisco-based bank’s board, the company said.

 

I wonder whether this limits Buffett's role in this scandal.

I don't think it does. It may be the case that Buffett won't say or do anything publicly. But he knows how to get it done with a wink and a nudge if he wants to.

[KCLarkin]

I don't think it does. It may be the case that Buffett won't say or do anything publicly. But he knows how to get it done with a wink and a nudge if he wants to.

 

Not much point speculating on Buffett, but this speculation from Becky Quick is interesting nonetheless:

https://uk.finance.yahoo.com/video/buffett-denies-kass-report-wells-154100450.html

 

[Guest Schwab711]

Guys, this isn't about just one specific event. What's not good is that they're not nipping this thing in the bud, clean the slate and push the reset button. As a consequence the hits keep on coming. Lat week we were talking about a 2 million hit to fees and maybe a 20 million lawsuit. This week we're talking maybe 250 mil pre tax and the hits keep on coming.  Just as I'm typing this note this hits Bloomberg:

 

http://www.bloomberg.com/news/articles/2016-09-29/wells-fargo-troubles-mount-with-penalty-for-soldiers-car-loans

 

I think the market/consumers/politicians just wants to see Stumff fired.  The longer Stumph stays on, the worse it's going to get.  If only there was someone who could call Stump to nudge him in the right direction...  Maybe then we'll get a "Stumf is out" rally and things will go back to business as usual.

 

I think you're right. Seems like someone at the big banks needs to be sacrificed and it was never going to be Jamie. Stumpf is the only remaining CEO from the old guard. I wonder if folks are waiting to sack him closer to election day.

[KCLarkin]

Jpm got hammered way worse after the "whale" incident.

 

Two things:

- London Whale was a great buying opportunity

- London Whale was a potential direct loss of $9B. WFC's potential direct losses are probably closer to $1B.

 

The impact on reputation and regulation is difficult to quantify. But I wonder how much recency bias impacts your assessment. Objectively, JPM deserved to get hammered way worse after the London Whale.

[rb]

That's right London Whale and this is are nothing alike. I haven't bought JPM then or ever since. Frankly their derivatives book scares the shit outta me.

 

At JPM you have lax controls in a massive derivatives trading operation. That is a life threatening thing for a bank. At WFC you have lax compliance controls at a retail bank. That is a job threatening event for the CEO that comes with negative headlines and some volatility in the stock price but the bank will be ok.

 

I know that there are fan boys here, but I don't have a problem if a bank CEO or two get the sack. But i do care if i take a large and permanent impairment to the value of the company.

[Cardboard]

If I have the choice between WFC and BAC today, my pick is the latter.

 

WFC has always had great profitability numbers but, I suspect that they are going to go through a major culture change which will mean more control at all levels which will slow them down: higher cost, less entrepreneurial culture, etc.

 

In the end, their numbers should mean revert or make them closer to other banks. It almost sounds like they are like the other banks with dubious practices or prior to 2008.

 

On the other hand, BAC is on the way up with an improving culture and improving profitability. Price of entry is lower vs book. The bar is set pretty low for them to surprise.

 

Cardboard

[rb]

I guess you can probably do well with BAC. What's keeping me away from that one is Merrill Lynch and the derivatives book. I'm ok getting a somewhat lower return with WFC and not having to worry about that. Different strokes.

[Guest Schwab711]

If I have the choice between WFC and BAC today, my pick is the latter.

 

WFC has always had great profitability numbers but, I suspect that they are going to go through a major culture change which will mean more control at all levels which will slow them down: higher cost, less entrepreneurial culture, etc.

 

In the end, their numbers should mean revert or make them closer to other banks. It almost sounds like they are like the other banks with dubious practices or prior to 2008.

 

On the other hand, BAC is on the way up with an improving culture and improving profitability. Price of entry is lower vs book. The bar is set pretty low for them to surprise.

 

Cardboard

 

http://www.marketwatch.com/story/thousands-of-complaints-suggest-account-issues-not-limited-to-wells-fargo-2016-09-12

 

I'd bet money BAC has (and maybe still is) doing essentially the same thing as WFC. Over the last 7 years, everyone has been trying to replicate WFC's branch efficiency. This is more widespread than what's being portrayed.

[Ulrich]

Hello,

 

i have to say "i don t understand what this whole scandal is about". These scandals about Wells Fargo take place in every bank around the globe and i know of a lot of German Banks that harmed their customers much much worser.

 

Wells fargo makes over half their income of interest income. The rest comes from different sources, the fees are only a small part of Wells Fargo's income. I think this is in the end not a big thing and if the world don t goes into a great economic downturn or Deutsche Bank goes bankrupt this year... no one will remember this in two years.

 

Wells Fargo has very little derivative exposure, good loans ( i checked again) and moderate leverage and is growing nicely in loans and deposits and pays a good dividend. I think the whole thing is greatly overdone!

[undervalued]

http://www.cnbc.com/2016/09/29/warren-buffett-denies-report-that-he-wants-major-changes-at-wells-fargo.html

 

It's funny that Buffett had to tell him that the interview didn't go so well. I guess in Stumpf's mind, his interview went well. That's what happen if you have too much confidence.

[KCLarkin]

Thanks Undervalued, that link seems to have the wrong video. Here is a direct link:

http://video.cnbc.com/gallery/?video=3000555324

 

[StubbleJumper]

Hey all:

 

Can somebody explain to me how WFC does NOT spend tens of millions or HUNDREDS of millions fending off numerous class action law suits?  OR in the case of people who had their credit report damaged, failed to get a job/mortgage, individual law suits?

 

OR as another poster postulated, lots of municipalities pulling their business from WFC?

 

THEN on top of all of that, you've got the execs from WFC testifying in front of Congress.  That looks terrible.

 

THEN you've got these banksters making tens of millions in bonus & pay...Sure, they are smart & hard workers, but they get paid tens of millions?  I would think one of the biggest cost savings would be outsourcing these "C" level jobs!  Just think of all the money they could save!  These dudes were paid tens of millions and they didn't know systemic fraud was going on?  Yep, outsource that job!  I bet you could get a non-American to work that job for only $2MM a year + pension + health care.  Heck, I might even apply!

 

Bottom line is I think WFC has a real chance of being permanently damaged here.  We'll see.

 

 

You are absolutely right.  WFC is certainly at risk of incurring fines/litigation in the hundreds of millions of dollars.  But divide that by 5 billion shares.  If this nonsense ends up being a one-time cost of $1 billion, that's $0.20/share pre-tax, or about 20% of one-quarter's earnings.  And if a few municipalities move their business elsewhere, that might be a temporary hit of $0.10 or $0.20/share annualized for the period where the municipalities act silly.

 

In terms of WFC's longer term reputation, I would observe that for a consumer, changing banks is a serious pain in the ass.  A consumer needs to be seriously pissed off to change from one bank to another (and almost no clients will be so pissed off that they change).  Corporate clients have little incentive to change either.  The only clients who have much of an incentive to change are grand-standing politicians....and what does that amount to?

 

No, the big cost over the longer term will be that the replacement management (after Stumpf gets canned/resigns) will be excessively conservative for a few years.

 

 

SJ

[Picasso]

No, the big cost over the longer term will be that the replacement management (after Stumpf gets canned/resigns) will be excessively conservative for a few years.

 

Sounds like Wells shareholders will get a feel for what it's like to have a Moynihan as CEO.

[Travis Wiedower]

In terms of WFC's longer term reputation, I would observe that for a consumer, changing banks is a serious pain in the ass.  A consumer needs to be seriously pissed off to change from one bank to another (and almost no clients will be so pissed off that they change). 

 

I'd be surprised if "almost no" clients leave over this. If I was one of those clients directly affected I'd 100% be leaving. I'd think others would as well just over principal. I left 5/3 over way less.

[StubbleJumper]

In terms of WFC's longer term reputation, I would observe that for a consumer, changing banks is a serious pain in the ass.  A consumer needs to be seriously pissed off to change from one bank to another (and almost no clients will be so pissed off that they change). 

 

I'd be surprised if "almost no" clients leave over this. If I was one of those clients directly affected I'd 100% be leaving. I'd think others would as well just over principal. I left 5/3 over way less.

 

 

So what is the issue that you perceive will trigger departures?  Out of 80+million accounts there were possibly 2 million unauthorized accounts created, of which about 200,000 incurred service charges.  So, if I've understood correctly, about 97.5% of clients were completely unaffected by these shenanigans.  Possibly another 2.25% of clients might have had accounts opened in their name and them rapidly closed, and they are probably blissfully unaware that it ever happened.  And possibly then another 0.25% of clients might have had an account opened without their approval, with service charges levied.

 

Of these clients, who is pissed off enough to change banks?  Who is pissed off enough to visit the HR department at their employer to fill out a form to change their payroll deposit to another bank?  And who is pissed off enough to change all of their automated bill payments to another bank?  And who is pissed off enough to take an hour out of their day to visit a new bank and open a new chequing account?  And who is so pissed off that they go to the trouble of moving their IRA/401K to another bank?

 

Switching financial institutions is a serious pain in the ass.  You need to be very pissed off with your bank to do so.  Which percentage of WFC's clients have a reason to go to that much trouble?  A few might move as a matter of principle, but these will be a very, very small minority of consumer advocate type of clients (and probably WFC would be better off without most of them).  Overall, I'd say damned few client will invest the time and effort to move, particularly since it seems like 99% of clients wouldn't even perceive that they were affected.

 

 

SJ

[rb]

Well some will leave. Their reasons will vary: principle indignation, whatever. But the numbers will be small and won't have much impact on IV.

 

The question on the bigger impact on IV is what's Wells' profitability going to be if they stop being the pedal to the the metal selling machine. Or as another poster mentioned when Stumpf gets canned and the new team is really gun shy. Or winning less new customers as they otherwise would have.

 

I'm with you. I think that all of the above will have an impact on IV but that it will be fairly small. I'm definitely selling my Wells stock and looking to buy more. Nonetheless I'm pissed off with the CEO that he was really sloppy about this. He totally underestimated the magnitude of the situation and was unprepared. Dealing with this kind of crap is part of his job. That's why he's paid the big bucks.

[Uccmal]

The stock is not cheap enough yet.  Jpm got hammered way worse after the "whale" incident.  It needs to be in the mid 30s for me to get remotely interested.  If this doesn't take it there it will get there in the next recession.

 

+1

 

As I await a lower entry point on the stock I continue to wonder whether or not  WFC meets Munger's "sewer" test definition?

 

Between the phony accounts and now the soldiers issue, Wells is the new BAC.  There is no way they avoid billions in legal expenses, fines, penalties, lawsuits etc.  Anyone here who thinks they dont eat one or two years earnings over this is naive. 

 

Others are posting about the fact that most retail customers wont leave.  On this I agree, but they are now on every single public entities list as a bad actor and there is no avoiding it.  Wells is in a situation of death by a thousand cuts:  Loss of money to fines, loss of money defending class action lawsuits, employee dismissal suits, soldier lawsuits, more fines, the cost of expensive external reviews throughout  the business, and losses from public entities cutting Wells out of business. 

 

And now they are under the microscope and that will surely bring out a whole bunch more dubious practices, and all the associated costs.  The class action lawsuit from dismissed and mistreated employees is going to be huge.  Its a slam dunk for anyone suing them for damn near anything right now. 

 

The headline that Stu..pid is going to give up one years pay is not helping them one bit in the climate prevalent in the US right now.  Just the fact he was to be paid 41 million being on front pages is fueling everyones anger right now.  This type of greed is why so many people are backing Trump and earlier Sanders.  These are not votes for Trump, they are a great big f-u to the establishment.

 

This is so much more noxious than the Whale episode.  The Whale episode was confined.  This situation has spiraled out of control. 

 

 

[Guest Schwab711]

Anyone here who thinks they dont eat one or two years earnings over this is naive. 

 

That's $20b-$40b. Just a bit dramatic, no? Respectfully, I think you have listened to too much 'noise'.

[undervalued]

I'm definitely selling my Wells stock and looking to buy more

 

Are you selling or are you buying?

[rb]

I'm definitely selling my Wells stock and looking to buy more

 

Are you selling or are you buying?

I apologize, typo, I meant to say that I'm not selling my Wells stock and looking to buy more.