WFC - Wells Fargo

[mcliu]

So oddly enough, this might be beneficial for shareholder..?As long as the business and reputation of the bank stays intact then the lack of loan growth (in a late-cycle) might actually reduce risk and allow the bank to return more capital to shareholders (through repurchases) while depressing the stock price..  :o

[sleepydragon]

Compared to the mkt, WFC only fell by 5% lol

[John Hjorth]

So oddly enough, this might be beneficial for shareholder..?As long as the business and reputation of the bank stays intact then the lack of loan growth (in a late-cycle) might actually reduce risk and allow the bank to return more capital to shareholders (through repurchases) while depressing the stock price..  :o

 

FED CCAR cycles does not work that way with regard to assesment of risk.

[Guest Schwab711]

So oddly enough, this might be beneficial for shareholder..?As long as the business and reputation of the bank stays intact then the lack of loan growth (in a late-cycle) might actually reduce risk and allow the bank to return more capital to shareholders (through repurchases) while depressing the stock price..  :o

 

FED CCAR cycles does not work that way with regard to assesment of risk.

 

My understanding is profit distribution plans are approved based on what the Fed thinks your bank can support. WFC will be able to support a greater payout ratio if they can not expand their asset base, all else equal. It's just the classic bank model with the formula rearranged: growth / ROE = retention (growth drives retention for WFC now instead of the typical ROE/retention choices of a bank driving growth rate). If growth is set to 0%, then distributions and/or capital ratios will probably increase. Maybe the Fed forces increased reserving or WFC invests in tech upgrades during this period and this is all moot, but that's the first-level implication of 0% growth. In 2016, retention rate was ~30%. That's ~$6.5b in new equity (3% increase in BV) in 2018 while growth is forced to be 0%. WFC is already at a 11.5% tier 1 capital ratio. This is a long way of saying, I think distributions should increase during the penalty period.

 

I hope WFC doesn't move up the risk ladder to more efficiently use their capital. It might be rational for them to consider doing so if the Fed didn't authorize increased distributions during the restriction period.

 

It's hard to say how this will work out for WFC but my first reaction was similar to mcliu. I think this could be a blessing in disguise for WFC, if they use the opportunity properly.

[John Hjorth]

So oddly enough, this might be beneficial for shareholder..?As long as the business and reputation of the bank stays intact then the lack of loan growth (in a late-cycle) might actually reduce risk and allow the bank to return more capital to shareholders (through repurchases) while depressing the stock price..  :o

 

FED CCAR cycles does not work that way with regard to assesment of risk.

 

My understanding is profit distribution plans are approved based on what the Fed thinks your bank can support. ...

 

If WFC does not have all its risks documented  in control at the latest moment for applying for CCAR approval this year for the share buy back during the next CCAR cycle 2018/19 [May 2018 perhaps? - Quite unlikely to me, based on the actual situation], the regulatory body must be supposed to instate a margin of safety in the 2018/19 buyback program, by approving a reduction compared to requested.

 

That does not make that particular part of the retained earnings disappear, though. [As already posted here in this topic.]

[Spekulatius]

As I am reading the letter from the FED again, I can guess what happened.

 

Starting with the investigation into the the fraudulent account openings in Spring 2017, the FED started to audit WFC management systems. As I recall, Stumpf stated in the Congress hearing that he did not know about many of the things going on at a branch level. The might seem like a. On ending answer, but from an auditor POV, it is a strong clue to dig very deeply on how the organization is actually run. I believe the latter audit found issues that go way beyond the issue of WFC defrauding customers and management not knowing about it (or claiming such). I believe this is why the FED letter contains such strong wording in terms of controlling growth and risk management -this isn’t just about how the deal with customers any more. Now WFC will have to redesign their management systems, out more controls in place and a very likely more bureaucracy until the whole system can become more streamlined again. This means increased cost, losing high potential employees and stunted growth. It certainly means get WFC’s risk management system is not best in class, quite the opposite.

[Viking]

My limited understanding is CCAR awards are partly a reward to banks: they get larger awards because they have the excess capital AND are in good working relationship with the Fed (regulators). I have a hard time understanding how WFC will get an outsized award because of the excess capital they may generate as a result of this action. The Fed will be looking to do them no favours in CCAR this year; my guess is the opposite - they will look for any reason to reduce their capital return.

 

When C ended up in the Feds cross hairs this resulted in a complete CCAR miss that year (if I remember correctly). I am not saying this will happen to WFC.

 

Any capital BAC has on the balance sheet will eventually get to shareholders; but all the big banks today have excess capital on their balance sheet and it is only slowly being allow to be returned to shareholders over many years. For many reasons, I am not going to be in a hurry to invest in WFC.

[John Hjorth]

To me, this is so specific and simple, yet so complicated.

 

It is about dishonest employees, trying, or getting away with, to take advantage of [uninformed?] customers [by socalled "crossselling"], because of an incentive program in the bank, [an incentive program, that makes sense, under the specific assumption, that all the employees are honest, which at least some of them turned out not to be].

 

Isen't that to you pretty simple to solve?

[oddballstocks]

As I am reading the letter from the FED again, I can guess what happened.

 

Starting with the investigation into the the fraudulent account openings in Spring 2017, the FED started to audit WFC management systems. As I recall, Stumpf stated in the Congress hearing that he did not know about many of the things going on at a branch level. The might seem like a. On ending answer, but from an auditor POV, it is a strong clue to dig very deeply on how the organization is actually run. I believe the latter audit found issues that go way beyond the issue of WFC defrauding customers and management not knowing about it (or claiming such). I believe this is why the FED letter contains such strong wording in terms of controlling growth and risk management -this isn’t just about how the deal with customers any more. Now WFC will have to redesign their management systems, out more controls in place and a very likely more bureaucracy until the whole system can become more streamlined again. This means increased cost, losing high potential employees and stunted growth. It certainly means get WFC’s risk management system is not best in class, quite the opposite.

 

This is the best reading between the lines I've seen.  I agree 100%.

 

As for best of class risk management, I'm not sure anyone but WEB followers believed that.  Their 'moat' was cross-selling, which as we came to find out wasn't quite what we thought it was.

 

The other mega that should fear an audit is JPM.  I have a book on my shelf where the author tied a few pieces of information together and ended up at the same conclusion as yours on JPM's risk management.

[Spekulatius]

To me, this is so specific and simple, yet so complicated.

 

It is about dishonest employees, trying, or getting away with, to take advantage of [uninformed?] customers [by socalled "crossselling"], because of an incentive program in the bank, [an incentive program, that makes sense, under the specific assumption, that all the employees are honest, which at least some of them turned out not to be].

 

Isen't that to you pretty simple to solve?

 

I believe you are incorrect and severely underestimate what led to this fraudulent behaviour and more importantly the scope of the Feds letter. The fraud perpetuated by WFC employees is just the tip of and iceberg, you need to ask yourself the question how it go to that point and what the broader implications are. Clearly the Fed thinks that way, so it is very relevant.

[StubbleJumper]

As I am reading the letter from the FED again, I can guess what happened.

 

Starting with the investigation into the the fraudulent account openings in Spring 2017, the FED started to audit WFC management systems. As I recall, Stumpf stated in the Congress hearing that he did not know about many of the things going on at a branch level. The might seem like a. On ending answer, but from an auditor POV, it is a strong clue to dig very deeply on how the organization is actually run. I believe the latter audit found issues that go way beyond the issue of WFC defrauding customers and management not knowing about it (or claiming such). I believe this is why the FED letter contains such strong wording in terms of controlling growth and risk management -this isn’t just about how the deal with customers any more. Now WFC will have to redesign their management systems, out more controls in place and a very likely more bureaucracy until the whole system can become more streamlined again. This means increased cost, losing high potential employees and stunted growth. It certainly means get WFC’s risk management system is not best in class, quite the opposite.

 

This is the best reading between the lines I've seen.  I agree 100%.

 

As for best of class risk management, I'm not sure anyone but WEB followers believed that.  Their 'moat' was cross-selling, which as we came to find out wasn't quite what we thought it was.

 

The other mega that should fear an audit is JPM.  I have a book on my shelf where the author tied a few pieces of information together and ended up at the same conclusion as yours on JPM's risk management.

 

 

Seriously?  The moat was and is exactly what management wanted.  Every officer in every branch was whoring themselves out to convince clients to take on another product, be it a credit card, line of credit, savings account or other.  That's exactly what management wanted and that was exactly in shareholders' interests.  A number of clever employees figured out how to exploit the company's  incentive structure and fraudulently signed people up for products.  So, how do you fix it?  I can offer a basic, Mickey Mouse solution that would stymie most renegade branch employees.  Put in place a policy where *every* time a customer "signs" up for a product, a letter is sent by snail mail to thank him for signing up, to provide the terms and conditions of his new product and other propaganda.  If a snail mail letter isn't sent, the sign-up doesn't count for the branch employee's gold star count.

 

It's exactly what we thought it was, but in a few cases it was a wee bit more than we wanted.  So fix it, but don't kill the cross selling culture.

 

 

SJ

[StubbleJumper]

To me, this is so specific and simple, yet so complicated.

 

It is about dishonest employees, trying, or getting away with, to take advantage of [uninformed?] customers [by socalled "crossselling"], because of an incentive program in the bank, [an incentive program, that makes sense, under the specific assumption, that all the employees are honest, which at least some of them turned out not to be].

 

Isen't that to you pretty simple to solve?

 

I believe you are incorrect and severely underestimate what led to this fraudulent behaviour and more importantly the scope of the Feds letter. The fraud perpetuated by WFC employees is just the tip of and iceberg, you need to ask yourself the question how it go to that point and what the broader implications are. Clearly the Fed thinks that way, so it is very relevant.

 

 

Why do you think it's the tip of the iceberg? 

[Guest Schwab711]

I just read the letters again and I don't see any reference to deeper issues other them sales practices. The c&d and letters are pretty specific and the Fed isn't usually coy about financial issues. This case seems to be an issue where historical regulatory action says widespread fraud gets a slap on the wrist and Yellen wanted to induce real change. I dony get what everyone is insinuating. Can someone detail what the additional problems are?

 

 

[sleepydragon]

If Feds knew this would trigger WFC down 10% in a day and also hurting all other banking stocks as well, they would have done this differently.

Now the new Fed guy  just got himself a mess to deal with.

[Gamecock-YT]

My limited understanding is CCAR awards are partly a reward to banks: they get larger awards because they have the excess capital AND are in good working relationship with the Fed (regulators). I have a hard time understanding how WFC will get an outsized award because of the excess capital they may generate as a result of this action. The Fed will be looking to do them no favours in CCAR this year; my guess is the opposite - they will look for any reason to reduce their capital return.

 

When C ended up in the Feds cross hairs this resulted in a complete CCAR miss that year (if I remember correctly). I am not saying this will happen to WFC.

 

Any capital BAC has on the balance sheet will eventually get to shareholders; but all the big banks today have excess capital on their balance sheet and it is only slowly being allow to be returned to shareholders over many years. For many reasons, I am not going to be in a hurry to invest in WFC.

 

Also don't forget the Fed's CCAR scenario is much more difficult than last year.

[Dynamic]

If Feds knew this would trigger WFC down 10% in a day and also hurting all other banking stocks as well, they would have done this differently.

Now the new Fed guy  just got himself a mess to deal with.

 

I think 10% down in a day needs to be taken in the context of the 6%+ decline in the DJIA/S&P500 on the same day, apparently caused by inflationary fears and doubts over the new head of the Fed, but possibly a continuation of Friday's jitters and a 'correction' to some of the excessive optimism of the January rally and maybe even knock-ons from the psychological effect of cryptocurrency declines in making optimists with no value anchor more hesitant to participate in what appears to be a choppy market or a precipitously falling one!

 

A 3-4% decline relative to the index normally wouldn't seem such an alarming hit in one stock, but a relatively measured adjustment of expectations given the seriousness of the Fed's demands.

 

However, given the decline in various market prices there are one or two stocks that I now consider attractively priced that I might at least spend some excess cash on, and I will also give consideration to whether I sell some of my smaller positions such as WFC and IBM to increase my higher-conviction positions or not. Fortunately I have no tax consequences from trading in my account, except 30% withholding tax on US dividends.

[Spekulatius]

If Feds knew this would trigger WFC down 10% in a day and also hurting all other banking stocks as well, they would have done this differently.

Now the new Fed guy  just got himself a mess to deal with.

 

Why do you think the Fed cares about WFC being down 10%? It’s still up from where it was a year ago, trades at 1.5x book and 13x earnings - hardly a distressed valuation. If anything, the Fed may feel good about feel good about kicking them where the sun doesn’t shine, to get WFC’s management going in the right direction.

[StubbleJumper]

If Feds knew this would trigger WFC down 10% in a day and also hurting all other banking stocks as well, they would have done this differently.

Now the new Fed guy  just got himself a mess to deal with.

 

Why do you think the Fed cares about WFC being down 10%? It’s still up from where it was a year ago, trades at 1.5x book and 13x earnings - hardly a distressed valuation. If anything, the Fed may feel good about feel good about kicking them where the sun doesn’t shine, to get WFC’s management going in the right direction.

 

 

Yes, if you believe that the Fed is completely pissed off with WFC's management, then they're probably pretty satisfied this morning.  Any WFC employee that was granted stock options in the last couple of years has just been administered a good old-fashioned ass-kicking.  For people whose options have flipped from being in the money to out, it's gotta hurt.  For people who are still in the money, the hurt is still there, but at least their option values aren't back to zero-ish.

 

 

SJ

[KCLarkin]

As for best of class risk management, I'm not sure anyone but WEB followers believed that.

 

I'm not sure WEB would even utter the phrase "risk management" let alone "best-in-class risk management". WEB believes that WFC has relatively prudent underwriting. WFC trades at a premium because it had higher ROE. That advantage has eroded, so the premium is no longer deserved. That's why WFC has underperformed and will likely continue to underperform.

 

The Fed action and the sales scandal are just noise.

[vinod1]

As for best of class risk management, I'm not sure anyone but WEB followers believed that.

 

I'm not sure WEB would even utter the phrase "risk management" let alone "best-in-class risk management". WEB believes that WFC has relatively prudent underwriting. WFC trades at a premium because it had higher ROE. That advantage has eroded, so the premium is no longer deserved. That's why WFC has underperformed and will likely continue to underperform.

 

The Fed action and the sales scandal are just noise.

 

+1

 

Only have a tracking position in WFC. Why I like WFC, along with MTB and USB is

 

- Sticks to basic banking. No large investment banking or trading operations

- Low funding costs reslting in high NIM

- Low efficiency ratio

- Conservative underwriting resulting in low charge offs

 

In WFC's case, the low costs seem to be driven by cross-selling. The other two have low costs as well but they do not have any cross-selling so I do not have a strong opinion on how important that is.

 

The main question is how much IV has been impaired as result of this. My guess is a very small amount.

 

I worked at a bank where Fed has issued something similar more than a decade back which resulted in the stock tumbling by 40% at that time. I did not work on mitigating the MOU with the Fed but several of my colleagues did and the work is really catching up with best practices. No idea what pissed them off but at least the stock reaction was way overdone. Unfortunately I was in the efficient market camp at that time and did not take advantage of that.

 

Vinod

 

 

[CorpRaider]

I felt like Wachovia was a good bank.  Before First Union took it over to cloak the stench of their brand, I mean.  Beast mode deposit gatherers.  I was looking at Park Sterling as a bank run by former Wachovia peeps, but I think they just sold out.

 

 

[Spekulatius]

To me, this is so specific and simple, yet so complicated.

 

It is about dishonest employees, trying, or getting away with, to take advantage of [uninformed?] customers [by socalled "crossselling"], because of an incentive program in the bank, [an incentive program, that makes sense, under the specific assumption, that all the employees are honest, which at least some of them turned out not to be].

 

Isen't that to you pretty simple to solve?

 

I believe you are incorrect and severely underestimate what led to this fraudulent behaviour and more importantly the scope of the Feds letter. The fraud perpetuated by WFC employees is just the tip of and iceberg, you need to ask yourself the question how it go to that point and what the broader implications are. Clearly the Fed thinks that way, so it is very relevant.

 

 

Why do you think it's the tip of the iceberg?

 

The big news in the Fed letter is the problem with WFC’s risk management, which sort of is unrelated to their failings regarding the consumer banking (unauthorized account openings). In my former post, I guessed, that this was discovered in an audit trail, when they were questioning management and apparently discovered, that management does not seem to have a good grasp on risk. I believe this is why the Fed stunted WFC’s growth. It is big news (if correct), because now we have two issues, rather than one and I think I lied lack of risk management is a tually a much bigger deal.

 

People here talk about WFC’s great underwriting, but how do we know it is still true? Thry were better heading into the Great Recession, but that was 11 years ago, Things may have changed over time, we won’t know until a recession hits.

 

Now granted, underwriting and risk management are two different things technically, but they are closely related and I can’t see how one is great without the other and vice versa.

[John Hjorth]

Spekulatius,

 

I apologize for a post, that I now consider unclear, after rereading it myself. My point was actually about execution on the changes the whole way down in the WFC organization. Somebody has to leave that quite flamboyant office tower in downtown San Francisco and get out in the departments and branches to communicate what is expected face to face, perhaps even delivering speaches to the staff, Mr. Balmer-like. Really to get some dirt under the nails. [Really burning through, so the message goes in.]

 

Your logic in your last post makes sense to me. A part of the total WFC risk picture is reputational risk.

 

- - - o 0 o - - -

 

Some anecdotal stuff at least partly related to this WFC situation:

 

Boersen.dk LONGREAD [2018.01.31]: "We had to get it right with all the basics. Otherwise, we had spent [DKK] 9 billion on nothing ". [unfortunately subscription protected].

 

It's the story about the Danish logistics company DSV A/S [DSV.CPH] acquiring American UTI, where the DSV management now has come forward with the whole story about a mistake at the size of DKK 9 B, which they paid for a potential zero - a train wreck. It's also the full and true story about how you change a train wreck to a gem - in one year!

 

- - - o 0 o - - -

 

I'm in the same camp as Viking with regard to Mr. Sloan's employment prospects at WFC, if he isen't soon to understand his job.

[Rasputin]

Our opinion on which bank has or does not have great underwriting don't matter. 

 

There is only one opinion that matters: The Fed. 

 

The Fed tells us every year, which bank is the best (lowest loan loss ratio in severely adverse scenario for the 9 quarter stressed period) in loan underwriting, it's called Dodd-Frank Act Stress Tests. 

 

Among the trillionaires:

 

2012 DFAST best: JPM, 2nd best: WFC

2013 DFAST best: BAC, 2nd best: WFC

2014 DFAST best: BAC, 2nd best: WFC

2015 DFAST best: BAC, 2nd best: WFC

2016 DFAST best: WFC, 2nd best: BAC

2017 DFAST best: BAC, 2nd best: WFC

 

 

[sleepydragon]

I really don’t see why WFC will be more risky than other banks like JPM.

They don’t have stuffs like XIV for example.

Taking deposits and making loans, that’s not very complicated.

I got my mortgage from wfc. Their underwriter checked everything. I even had to write a one page to explain how do I come up with my future income estimates - even though I had assets that’s already exceeding the mortgage. I sent so many documents to them. It’s more documents than getting the green card!