WFC - Wells Fargo

[John Hjorth]

BRK's position in WFC is financed using - about free, so-so - insurance float. That's a no brainer.

[cmlber]

The stock price increase was far more than the EPS increase.

JPM was 7x PE in 2012. That's a no brainer at that time.

WFC at 11x PE isn't such a no brainer.

 

Buffet loves WFC at 10x pretax PE because Berkshire is so big now and there is no other great ways of making money.

He used to be buying 2x PEs when he first started and he was making 29% a year after fees for the first ten years.

 

Let's say earnings will be an even $21 billion in 2016, and let's say deposits grow by 6%/year (lower than the 7.5% CAGR over the last 5 years).

 

Let's say they can invest those deposits at current 2.95% NIM.

 

Let's say they need to retain 10% of deposits as equity consistent with their tier 1 target.

 

Let's say they utilize 100% of distributable free cash flow (earnings less 10% of growth in deposits) to buy back stock and let's assume the stock price increases by 15%/year from $45/share (i.e. all buybacks in 2017 are at $52/share, all buybacks in 2018 are at $60/share, etc.).

 

Let's assume non-interest revenue growth offsets expense growth.

 

Under those assumptions, WFC is earning $7/share in 2020 with no increase in interest rates.

 

Put any reasonable multiple on that and you get a stock price well above todays.

 

If rates are rising by 2020, you'll get higher earnings ($8/share if NIM just gets a little closer to 2013 levels) and likely a much higher multiple. 

[Guest wellmont]

not everybody is looking for the next "zinc" or bellatrix for every stock they buy. I am certainly not. some people are quite happy with a safe 10% or better annual, return. some people are content to get a growing 3.4% current yield when spy yields less, and quality bonds yield less. and those bond yields will never grow.

 

banks were much cheaper in 2012. so were most stocks. the world was different then. but how many here bought jpm in low $30s? it is never very obvious in real time going through the crisis, as the Reuters article points out. the consensus view was that jpm would have to alter their business model, and would not be able to earn as much as before. that was wrong. and it sounds very familiar to what the media is saying today. the reason wfc is not trading at 7x is because not even the bears think this crisis will hurt the company as bad as london whale hurt jpm. the market does not believe there will be any significant impairment. and wfc has already endured two clown show congressional meetings. that is behind wfc.

 

i don't believe buffett loves wfc at 10x pre tax. from my reading the post said he is "comfortable" buying it there if he has available funds, and nothing else appeals to him. the post suggests that buffett would buy wfc at 10x pti before he would buy another company at 10x pti. he uses wfc as a yardstick. that tells you something about how he feels about the durability of the wfc franchise.

 

btw wfc would be trading at $300b+ market cap if it traded at 10x, which is a far cry from the $225b where we are today. wfc rarely ever gets this cheap. this is not your "standard issue" bank. the only way you can buy this stock this cheap is if it is under a cloud. in this case, one that will be forgotten sooner than we expect imo. the current sequioa fund letter, where they announce their purchase of wfc for the fund, has a very good summary of why wells fargo is a special business. not a special bank. a special business.

 

 

[Ballinvarosig Investors]

Let's say earnings will be an even $21 billion in 2016, and let's say deposits grow by 6%/year (lower than the 7.5% CAGR over the last 5 years).

 

Let's say they can invest those deposits at current 2.95% NIM.

 

Let's say they need to retain 10% of deposits as equity consistent with their tier 1 target.

 

Let's say they utilize 100% of distributable free cash flow (earnings less 10% of growth in deposits) to buy back stock and let's assume the stock price increases by 15%/year from $45/share (i.e. all buybacks in 2017 are at $52/share, all buybacks in 2018 are at $60/share, etc.).

 

Let's assume non-interest revenue growth offsets expense growth.

 

Under those assumptions, WFC is earning $7/share in 2020 with no increase in interest rates.

 

Put any reasonable multiple on that and you get a stock price well above todays.

 

If rates are rising by 2020, you'll get higher earnings ($8/share if NIM just gets a little closer to 2013 levels) and likely a much higher multiple.

These are almost exactly the same numbers that I came up with in my base case thesis. The numbers are not so much value in plain sight, more like value in plain sight that was come up to you and tried to repeatedly beat you in the head with a hammer. With the Schiller PE ratio at 25, can someone please point me in the direction of something else in that index that you could be confident that it can out-perform WFC in the next 5 years?

[dyow]

Let's say earnings will be an even $21 billion in 2016, and let's say deposits grow by 6%/year (lower than the 7.5% CAGR over the last 5 years).

 

Let's say they can invest those deposits at current 2.95% NIM.

 

Let's say they need to retain 10% of deposits as equity consistent with their tier 1 target.

 

Let's say they utilize 100% of distributable free cash flow (earnings less 10% of growth in deposits) to buy back stock and let's assume the stock price increases by 15%/year from $45/share (i.e. all buybacks in 2017 are at $52/share, all buybacks in 2018 are at $60/share, etc.).

 

Let's assume non-interest revenue growth offsets expense growth.

 

Under those assumptions, WFC is earning $7/share in 2020 with no increase in interest rates.

 

Put any reasonable multiple on that and you get a stock price well above todays.

 

If rates are rising by 2020, you'll get higher earnings ($8/share if NIM just gets a little closer to 2013 levels) and likely a much higher multiple.

These are almost exactly the same numbers that I came up with in my base case thesis. The numbers are not so much value in plain sight, more like value in plain sight that was come up to you and tried to repeatedly beat you in the head with a hammer. With the Schiller PE ratio at 25, can someone please point me in the direction of something else in that index that you could be confident that it can out-perform WFC in the next 5 years?

 

i am gonna poop on this party. I don't think this is a value play unless it hits the $30s. 

 

-The deposit growth is misleading bc some of it is sticky some is not.  But more importantly they won't earn 2.95% on new deposits, the last time i checked they had over 250B of liquidity earning nothing.  They can't find enough loans to keep up with deposit growth and they are not willing to invest in treasuries (or other assets) bc of interest rate risk from a sudden rise in interest rates. Also they need excess liquidity bc of the FED's leverage ratio rules.

 

If you don't believe me check the last few years of earnings - deposits exploded but their net interest income has not moved much. 

 

- Also the deposits do not count towards their 10-11% cap ratio, that depends on common equity/retained earnings and their risk weighted assets.  Recently the Tarullo (the guy from the FED who oversees bank regulations) is talking about increasing the buffer, which means more future earnings would need to kept for capital.  Tarullo is borderline nuts and his only goal in life is to make sure banks hold more capital, and not make money or pay dividends.  This overregulation of capital and limiting dividends to 30% is impacting the PE - and bc of this I think a 11-12 PE on this is reasonable right now.       

 

My take is this stock is not hitting $60+ unless rates go up.

     

All that said, I like wells, you won't lose much here at these prices if you want to park your excess cash long term and get a 3%+ yield.  All this fake account stuff will pass, and if rates rise or inflation surprises nobody will give a shit about this and the stock will go higher, which also makes it a decent hedge in this market.

 

[JBTC]

 

the current sequioa fund letter, where they announce their purchase of wfc for the fund, has a very good summary of why wells fargo is a special business. not a special bank. a special business.

 

Would you mind quoting why they thought WFC is so special? Thanks.

 

[Guest wellmont]

 

the current sequioa fund letter, where they announce their purchase of wfc for the fund, has a very good summary of why wells fargo is a special business. not a special bank. a special business.

 

Would you mind quoting why they thought WFC is so special? Thanks.

the document is on their website.

http://www.sequoiafund.com/RCG%20Letter%207-12.pdf

[BRK7]

 

the current sequioa fund letter, where they announce their purchase of wfc for the fund, has a very good summary of why wells fargo is a special business. not a special bank. a special business.

 

Would you mind quoting why they thought WFC is so special? Thanks.

the document is on their website.

http://www.sequoiafund.com/RCG%20Letter%207-12.pdf

 

After reading their strong endorsement of Wells in the letter, I was a bit a surprised to then read that the portfolio position weighting is only 2% (3% if you include the look-through from BRK).  Possibly they were (are?) still building the position, because they went from 92k shares at 3/31 to 5.2M at 6/30.  It will be interesting to see their 3Q activity. 

 

[Grenville]

A congressman referencing Salomon during the hearing and referring to Buffett's words:

 

 

Stumpf just doesn't understand those words…A clueless nice guy or just trying to act dumb to save his job.

 

Stumpf apparently has so much free time that he sits on the board of Target and Chevron….The ranking member states that it will be her goal to break up WFC and she's the one that mentions the other boards Stumpf sits on.

[Spekulatius]

A congressman referencing Salomon during the hearing and referring to Buffett's words:

 

 

Stumpf just doesn't understand those words…A clueless nice guy or just trying to act dumb to save his job.

 

Stumpf apparently has so much free time that he sits on the board of Target and Chevron….The ranking member states that it will be her goal to break up WFC and she's the one that mentions the other boards Stumpf sits on.

 

Playing dumb won't save Stumpf's job, but avoids that he implicates himself. I think he knows much much more about how WFC's runs their business than what he admitted during the Congress hearing, he just don't want to present the dirty details on a silver platter.

[cmlber]

i am gonna poop on this party. I don't think this is a value play unless it hits the $30s. 

 

-The deposit growth is misleading bc some of it is sticky some is not.  But more importantly they won't earn 2.95% on new deposits, the last time i checked they had over 250B of liquidity earning nothing.  They can't find enough loans to keep up with deposit growth and they are not willing to invest in treasuries (or other assets) bc of interest rate risk from a sudden rise in interest rates. Also they need excess liquidity bc of the FED's leverage ratio rules.

 

If you don't believe me check the last few years of earnings - deposits exploded but their net interest income has not moved much. 

 

They've grown loans by 4%/4%/6% the last three years. 

 

So bring down the deposit growth assumption from 6% to 4% so we can be confident that they can lend out each new $ of deposits and you get $6.5/share in 2020 without any increase in interest rates using the same assumptions.  What difference does it make whether they earn $6 or $7?  Put any reasonable multiple on it and you're getting a very good return.  If rates rise it'll be a 20%+ compounder for the next 4-5 years.

[JBTC]

 

the current sequioa fund letter, where they announce their purchase of wfc for the fund, has a very good summary of why wells fargo is a special business. not a special bank. a special business.

 

Would you mind quoting why they thought WFC is so special? Thanks.

the document is on their website.

http://www.sequoiafund.com/RCG%20Letter%207-12.pdf

 

After reading their strong endorsement of Wells in the letter, I was a bit a surprised to then read that the portfolio position weighting is only 2% (3% if you include the look-through from BRK).  Possibly they were (are?) still building the position, because they went from 92k shares at 3/31 to 5.2M at 6/30.  It will be interesting to see their 3Q activity.

 

It doesn't seem like their assessment of Wells was any different from the consensus. Not saying it's good or bad, but the reality is until this scandal WFC was just boring.

 

Another point is even though Sequoia always prides itself on doing extremely thorough research, they apparently failed to detect anything about WFC's problematic cross-selling prior to their initiating a position. Makes one wonder how useful and practical it really is to "kick the tires".

 

[dyow]

i am gonna poop on this party. I don't think this is a value play unless it hits the $30s. 

 

-The deposit growth is misleading bc some of it is sticky some is not.  But more importantly they won't earn 2.95% on new deposits, the last time i checked they had over 250B of liquidity earning nothing.  They can't find enough loans to keep up with deposit growth and they are not willing to invest in treasuries (or other assets) bc of interest rate risk from a sudden rise in interest rates. Also they need excess liquidity bc of the FED's leverage ratio rules.

 

If you don't believe me check the last few years of earnings - deposits exploded but their net interest income has not moved much. 

 

They've grown loans by 4%/4%/6% the last three years. 

 

So bring down the deposit growth assumption from 6% to 4% so we can be confident that they can lend out each new $ of deposits and you get $6.5/share in 2020 without any increase in interest rates using the same assumptions.  What difference does it make whether they earn $6 or $7?  Put any reasonable multiple on it and you're getting a very good return.  If rates rise it'll be a 20%+ compounder for the next 4-5 years.

 

Your numbers wrong. Look at past history.

 

10,643 net interest income in Q4 2012, loans 782B

 

11,733 net interest income Q2 2016, 950B

 

loans went up 170B in 3.5 years, about 20% gross.  net interest income went up 1.1B (this incudes all interest income not just loans).  That is 4.4B a year, after tax it is 3B. Per share that is about 60 cents.  So 60 cents a share on all interest income for all their assets in 3.5 years. 

 

If interest rate stay low you will be lucky to get to $5 a share by 2020. 

 

 

 

 

 

 

[Picasso]

Chicago Treasurer Kurt Summers plans to divest $25 million the city has invested with Wells Fargo & Co. after the company admitted to opening potentially millions of bogus client accounts, joining state officials who have pulled business from the bank because of the scandal.

 

Summers, whose office manages the city’s $7 billion investment portfolio, plans to “unwind these assets as expeditious as possible in a fashion that is prudent and will protect taxpayer money,’’ according to a statement from his office sent to Bloomberg News.

 

“The City Treasurer is proud to stand with working families from Chicago and across the nation by divesting in Wells Fargo & Co.,’’ according to the e-mailed statement. “Chicago deserves better.’’

 

This must be such a pain in the ass for employees in non-banking parts of WFC. 

[glorysk87]

not everybody is looking for the next "zinc" or bellatrix for every stock they buy. I am certainly not. some people are quite happy with a safe 10% or better annual, return. some people are content to get a growing 3.4% current yield when spy yields less, and quality bonds yield less. and those bond yields will never grow.

 

banks were much cheaper in 2012. so were most stocks. the world was different then. but how many here bought jpm in low $30s? it is never very obvious in real time going through the crisis, as the Reuters article points out. the consensus view was that jpm would have to alter their business model, and would not be able to earn as much as before. that was wrong. and it sounds very familiar to what the media is saying today. the reason wfc is not trading at 7x is because not even the bears think this crisis will hurt the company as bad as london whale hurt jpm. the market does not believe there will be any significant impairment. and wfc has already endured two clown show congressional meetings. that is behind wfc.

 

i don't believe buffett loves wfc at 10x pre tax. from my reading the post said he is "comfortable" buying it there if he has available funds, and nothing else appeals to him. the post suggests that buffett would buy wfc at 10x pti before he would buy another company at 10x pti. he uses wfc as a yardstick. that tells you something about how he feels about the durability of the wfc franchise.

 

btw wfc would be trading at $300b+ market cap if it traded at 10x, which is a far cry from the $225b where we are today. wfc rarely ever gets this cheap. this is not your "standard issue" bank. the only way you can buy this stock this cheap is if it is under a cloud. in this case, one that will be forgotten sooner than we expect imo. the current sequioa fund letter, where they announce their purchase of wfc for the fund, has a very good summary of why wells fargo is a special business. not a special bank. a special business.

 

From the letter:  " It leads the industry in the intensity of its customer relationships with over six products per customer"

 

Haha......eeeeesh.

[plato1976]

Hi, Wellmont:

 

How can we be sure that the above par profitability of WFC (for example, compared with BAC) is not purely the result of the aggressive sales behavior internally, and if removed its profitability will just be at BAC's level?

 

 

 

the current sequioa fund letter, where they announce their purchase of wfc for the fund, has a very good summary of why wells fargo is a special business. not a special bank. a special business.

 

Would you mind quoting why they thought WFC is so special? Thanks.

the document is on their website.

http://www.sequoiafund.com/RCG%20Letter%207-12.pdf

[Guest wellmont]

Hi, Wellmont:

 

How can we be sure that the above par profitability of WFC (for example, compared with BAC) is not purely the result of the aggressive sales behavior internally, and if removed its profitability will just be at BAC's level?

 

 

 

the current sequioa fund letter, where they announce their purchase of wfc for the fund, has a very good summary of why wells fargo is a special business. not a special bank. a special business.

 

Would you mind quoting why they thought WFC is so special? Thanks.

the document is on their website.

http://www.sequoiafund.com/RCG%20Letter%207-12.pdf

I don't think it's knowable right now. it's a risk. it's something we will find out over time. I don't see bac as a static enterprise. I think it's managed better than it ever has been, and metrics will improve.

 

[tng]

Anybody have any reason why I shouldn't just swap my WFC position into another big bank like BAC or JPM? Valuation-wise, WFC is about in line with JPM on a P/E basis. WFC might regain the "premium" status in the future and trade at a higher multiple, but it may also be hit with regulatory and legal problems. We all saw how BAC became a punching bag for years for legacy Countrywide/Merrill issues. With BAC, there was actually a reason for the government to be a little bit more lenient considering BAC was strong-armed into buying Merrill to save the system and strong-armed into not activating the material adverse change clauses.

 

I do think WFC is cheap and this will probably blow over and everybody will forget about it in a few years. But all the other banks are very cheap too.

[KCLarkin]

Anybody have any reason why I shouldn't just swap my WFC position into another big bank like BAC or JPM?

 

I wonder what the returns would be if you rotated between JPM/BAC/WFC every time they were hit with a scandal (post crisis) versus rotating INTO the scandal-plagued bank. I suspect running into the burning fire would be more profitable.

 

Disclosure: I sold a big chunk of WFC today. Do as I say, not as I do?

[cmlber]

i am gonna poop on this party. I don't think this is a value play unless it hits the $30s. 

 

-The deposit growth is misleading bc some of it is sticky some is not.  But more importantly they won't earn 2.95% on new deposits, the last time i checked they had over 250B of liquidity earning nothing.  They can't find enough loans to keep up with deposit growth and they are not willing to invest in treasuries (or other assets) bc of interest rate risk from a sudden rise in interest rates. Also they need excess liquidity bc of the FED's leverage ratio rules.

 

If you don't believe me check the last few years of earnings - deposits exploded but their net interest income has not moved much. 

 

They've grown loans by 4%/4%/6% the last three years. 

 

 

Your numbers wrong. Look at past history.

 

10,643 net interest income in Q4 2012, loans 782B

 

11,733 net interest income Q2 2016, 950B

 

loans went up 170B in 3.5 years, about 20% gross.  net interest income went up 1.1B (this incudes all interest income not just loans).  That is 4.4B a year, after tax it is 3B. Per share that is about 60 cents.  So 60 cents a share on all interest income for all their assets in 3.5 years. 

 

If interest rate stay low you will be lucky to get to $5 a share by 2020. 

 

You're taking a cursory look in the rearview mirror.  I said loans have grown by 4%+ in recent years.  2011 year end loans outstanding $769 billion.  2015 year end loans outstanding $916 billion.  CAGR is 4.5%.  My number is right. 

 

Net interest income hasn't grown at that rate in the recent past (which I didn't claim) primarily because rates have come down but also because they've added liquidity, those forces have acted against the deposit/loan growth.  Both are already in the NIM.  If you adjust for the fact that loans as a % of assets are about 8% lower than they were in 2011 and cash held at the fed is about 8% higher than it was in 2011, the NIM without that mix shift in 2015 would have been about 3.3% (vs. 2.95%), or a full 16% lower than in 2011 (3.94%).  That has nothing to do with added liquidity and everything to do with lower interest rates.  Absent lower interest rates, but assuming permanently higher levels of liquidity and lower levels of lending per dollar of assets, net interest income would have grown by a CAGR of 6% since 2011.

 

Rates aren't likely to go lower, so that headwind is done even if rates don't rise.  On a go forward basis net interest income is likely to grow at around the growth in loans if rates don't change.  If you disagree, that's what makes a market.  We'll see in a few years.

[rb]

Anybody have any reason why I shouldn't just swap my WFC position into another big bank like BAC or JPM? Valuation-wise, WFC is about in line with JPM on a P/E basis. WFC might regain the "premium" status in the future and trade at a higher multiple, but it may also be hit with regulatory and legal problems. We all saw how BAC became a punching bag for years for legacy Countrywide/Merrill issues. With BAC, there was actually a reason for the government to be a little bit more lenient considering BAC was strong-armed into buying Merrill to save the system and strong-armed into not activating the material adverse change clauses.

 

I do think WFC is cheap and this will probably blow over and everybody will forget about it in a few years. But all the other banks are very cheap too.

As others said, it's probably not a good idea to sell low.

 

Also if you move out of WFC and into BAC and JPM then you also move into massive investment banks with trillion dollar level derivatives books and happy boys doing all kinds of trades with that. That business also isn't that valuable. If you take GS as a comp (arguably the best investment bank) the I-banks are valued at 0.75 P/B at best. So that propositions isn't so enticing.

[dyow]

I said your EPS of $6-7 was wrong based on additional interest income.  Forget your NIM, I never talked about NIM.  Why are you throwing out NIM CAGR or exact percentages?    "It is better to be approx right than precisely wrong"....you are beyond precisely wrong, you are "prong" if you will. 

 

This is your quote from earlier in the thread.

 

"Let's say they need to retain 10% of deposits as equity consistent with their tier 1 target."

 

More prong.  Tier 1 capital counts common + retained earnings not deposits. 

 

I don't think i will change your mind, the worst part is i like wells fargo, but i shall not own this stock as long as you are in it.

 

Good day to you sir

 

[racemize]

I don't think i will change your mind, the worst part is i like wells fargo, but i shall not own this stock as long as you are in it.

 

That's pretty amazing that you wouldn't own something that you like just to spite someone else...

[LR1400]

Seriously, can this little blip hurt the strongest bank in the US, if not the world......one supported by multiple billionaire investors.

I feel good, this shit will blow over regardless as to whether the CEO is replaced or not.

[Picasso]

dyow is quickly turning into one of my favorite posters on CoBF.  He/she makes a lot of good points underneath the humor.  The humor is just a free call option I didn't have to pay for.