WFC - Wells Fargo

[cmlber]

But by "they can't" I mean 'I don't think regulators will let them'. 

 

But regulators ARE letting them...  their 2018 (Q3 2018 through Q2 2019) Capital Plan was approved in June and authorizes WFC to return $32.5B for a business that's earning ~$20B.

 

At the current price you're not paying for any growth.  We're earning 10%/year (giving no credit to the cost cutting initiatives) just as long as the business doesn't shrink.  The asset cap won't cause the business to shrink...  In a world with 2.9% 10yr treasuries that is stupidly cheap.  And it comes with very good downside protection.  TBV/share is $31.41; if the business continues as is for 3.5 years and then liquidates, we'd come out whole.

 

I think at this point, at this price, the asset cap and associated scandals are a positive.  Any other big bank you have to worry if (more likely, when) they're going to have a Wells Fargo moment.  WFC has had 1,000s of employees, consultants, and regulators looking in every corner of the business for skeletons in closets for 2 years now.  Once the cap is gone I think we'll be able to put a pretty high degree of certainty on the fact that WFC has the least regulatory risk of the big banks.

[nkp007]

If WFC is over-capitalized and can't grow, they should be returning 100%+ of earnings. They can't. They will remain over-capitalized until the ceiling is eliminated.

 

They can, and they are... YTD they've distributed $19B through buybacks & dividends on earnings of $15B, and Q3 they distributed $9B on earnings of $6B. 

 

At the Q3 pace it would take them ~20 months to distribute out all the excess capital.

 

I may be falling too far in to devil's advocate territory in some sense with my posts. But by "they can't" I mean 'I don't think regulators will let them'. Their loan book is a bit more risky then is generally associated with their reputation. They have a meaningful amount of high-priced condo loans, PE exposure, leverage loan exposure, auto, ect. They also have high CRE exposure (higher than I expected them to be associated with). This gets to why I think it will be hard to grow NIM without rate tailwinds. None of that exposure is going to dent them long-term (which is why I'm trying to say all this in such a way that is short-term cautious as opposed to my views on OZK, for instance) but it makes me wonder how they will grade in future stress tests as they distribute excess cash + can't grow (see earlier post on consequences of that) + any additional concern around the exposures WFC has. Finally, depending on the trajectory of rates in 1 year or so, additional issues may pop up. That's where I'm coming from when I say "they can't". I should have said, I think there's a good chance they won't be allowed to.

 

As I said, mid-$40's is not a bad price. I'm just wondering if the asset ceiling is a bigger deal then everyone thought. The concerns around the asset ceiling would make more sense at $60 then <$50 since some of those concerns are somewhat baked in. I should have thought this through and posted this awhile ago. It's hard to say anything bad about WFC but they do have a lot of work to do.

 

 

LOLOLOL. Dude they literally are. They are way overcapitalized and distributing huge amounts of cash via buybacks + repurchases to shareholders (check recent presentatons).

 

Read the conference call transcript / earnings presentation.

[Guest Schwab711]

But by "they can't" I mean 'I don't think regulators will let them'. 

 

But regulators ARE letting them...  their 2018 (Q3 2018 through Q2 2019) Capital Plan was approved in June and authorizes WFC to return $32.5B for a business that's earning ~$20B.

 

At the current price you're not paying for any growth.  We're earning 10%/year (giving no credit to the cost cutting initiatives) just as long as the business doesn't shrink.  The asset cap won't cause the business to shrink...  In a world with 2.9% 10yr treasuries that is stupidly cheap.  And it comes with very good downside protection.  TBV/share is $31.41; if the business continues as is for 3.5 years and then liquidates, we'd come out whole.

 

I think at this point, at this price, the asset cap and associated scandals are a positive.  Any other big bank you have to worry if (more likely, when) they're going to have a Wells Fargo moment.  WFC has had 1,000s of employees, consultants, and regulators looking in every corner of the business for skeletons in closets for 2 years now.  Once the cap is gone I think we'll be able to put a pretty high degree of certainty on the fact that WFC has the least regulatory risk of the big banks.

 

Are, not will. I'm not saying 100%, I guarantee the regulators won't let them next year. I'm saying, consider the following:

 

At 9/30/2018, WFC appears to be approximately $33.6b over-capitalized. With $23.5b in preferred stock, target common equity is ~$115.3b at the moment.

 

By 6/30/2019, WFC will have approximately ~$145b in common equity ($17b in NI with $21b in remaining distributions). That's still $29.7b over-capitalized. However, WFC's RWA currently includes just $319.4b in "operational risk" from $299.6b at the beginning of the year. BAC is currently at $500b. I would suspect WFC's operational risk will rise towards ~$400b. I have never tried to look in to how this gets calculated but WFC has certainly failed many internal processes that contribute to this capital weighting. That's an extra ~$9b or so of capital that must be retained, if WFC goes to $400b. Further, as I pointed out on how WFC can't grow absolute earnings without help, I suspect WFC will continue to move up the risk-return curve to seek yield, depending on how long the cap remains in place. If the cap remains in place for multiple years, moving up the chain could take up a further ~$10b or so of additional capital for an equal amount of nominal assets (simply a minor increase in the proportion of risky assets held relative to 12/31/2017).

 

Thus, I don't think it's a guarantee that all the money gets returned. Again, I'm not saying "100% guarantee". I'm saying that there's decent odds that given what we know at present, this is how WFC's loan book and capital calculations may evolve. Maybe it doesn't affect your value, but there are a lot of banks yielding 10% right now. Some of them have proportionally less concentration to risky assets and interest rate risk. The increased geography risk and reduced scale may be the reason WFC seems more attractive than many regionals but I think it's at least worth acknowledging that the asset ceiling has brought about many unknowns and complicated WFC's hope to return excess capital.

[cmlber]

But by "they can't" I mean 'I don't think regulators will let them'. 

 

But regulators ARE letting them...  their 2018 (Q3 2018 through Q2 2019) Capital Plan was approved in June and authorizes WFC to return $32.5B for a business that's earning ~$20B.

 

At the current price you're not paying for any growth.  We're earning 10%/year (giving no credit to the cost cutting initiatives) just as long as the business doesn't shrink.  The asset cap won't cause the business to shrink...  In a world with 2.9% 10yr treasuries that is stupidly cheap.  And it comes with very good downside protection.  TBV/share is $31.41; if the business continues as is for 3.5 years and then liquidates, we'd come out whole.

 

I think at this point, at this price, the asset cap and associated scandals are a positive.  Any other big bank you have to worry if (more likely, when) they're going to have a Wells Fargo moment.  WFC has had 1,000s of employees, consultants, and regulators looking in every corner of the business for skeletons in closets for 2 years now.  Once the cap is gone I think we'll be able to put a pretty high degree of certainty on the fact that WFC has the least regulatory risk of the big banks.

 

WFC's RWA currently includes just $319.4b in "operational risk" from $299.6b at the beginning of the year. BAC is currently at $500b. I would suspect WFC's operational risk will rise towards ~$400b. I have never tried to look in to how this gets calculated but WFC has certainly failed many internal processes that contribute to this capital weighting. That's an extra ~$9b or so of capital that must be retained, if WFC goes to $400b.

 

Directionally that's a fair point, although I'm only crediting them with $20B of excess capital so there's still a buffer.

What's the basis for this assumption though?  Not the direction of "up" (which is a reasonable assumption), but the magnitude and specificity of the $400B number?  Like you, I also am not entirely sure how this gets calculated, but assuming it was previously calculated properly, the account opening scandal shouldn't have that enormous of an impact.  Operational risk is meant to capture the size and frequency of losses due to internal failures.  The account opening scandal didn't really cause significant losses.  It caused significant damage to Wells' reputation, but I don't believe "operational risk" includes that type of damage. 

 

You're correct, if Wells wants to increase its RWA by moving up the risk-return curve for more yield, then the excess capital can't all get distributed.  But on the other hand, that would mean earnings would go up wouldn't it...  Regardless, I don't see any evidence of this happening, and think its much more likely that they stick to business as usual and manage the asset cap by plowing cash out to shareholders and shedding some low-quality business for a brief period of time before getting back to absolute growth.

[Guest Schwab711]

What's the basis for this assumption though?  Not the direction of "up" (which is a reasonable assumption), but the magnitude and specificity of the $400B number?

 

WFC is at $320b and BAC is at $500b so I split the difference haha. According to BAC's quarterly LCR, operational risk is based on failed internal control processes and the like. Without knowing how they calculate this, I'm just assuming a round number in a direction.

 

This is partially why I like BAC more at this moment (though WFC is probably less risky overall). I think BAC is going to be over-capitalized by more than it appears they are today. I never liked BAC much compared to JPM/WFC, but I can see a relatively clear path to 13%-14% ROE (or near-20% ROTCE).

 

I did forget that moving up RWA is based on my assumption that they can improve NIM slightly in a steady-state rate environment. That's a good point that reduced buyback capacity means less reliance on buybacks to increase earnings.

[Rasputin]

I'm gonna put an end to these 2 madness:

 

1.  Asset cap to WFC is damaging to treasury management business, will cause reduction to NIAC (net income available to shareholders), and 2.  Operational risk within WFC RWA

 

1.  There is another $2 Trillion GSIB with self impose asset cap (without publicly announcing it).  It's called Bank of America.

 

Year End  Total Assets ($ in billions)

2010        2265

2011        2129

2012        2210

2013        2102

2014        2105

2015        2144

2016        2188

2017        2281

 

BAC basically self imposed asset cap for roughly 7 years, while global transactions services (includes treasury management) grew from $5.743 B in 2012 to $7.188 B in 2017 (they had a reorganization in 2012 so prior data is not comparable).  Please go to the annual reports to see revenues, net income available to common shareholders for year 2010-2017, you'll be amazed at how wonderful this asset cap is.  Similar trend to NIAC will occur at WFC going forward, to much lesser degree, however. 

 

I'll let people read WFC's 10K exhibit 13, table 8.  Pay particular focus to line items called : Operating Losses, Outside Professional Fees, and Salaries, Commission, Employee Benefits.

 

2.  For both WFC and BAC, Standardized Approach is governing.  Operational risk is part of Advanced Approach RWA. 

 

For WFC, please refer to this link

https://www08.wellsfargomedia.com/assets/pdf/about/investor-relations/basel-disclosures/2018-third-quarter-pillar-3-disclosure.pdf

 

As of 9/30/2018

Advanced Approach RWA = $1189.464 Billion (includes $319.388 Operational Risk)

Standardized Approach RWA = $1250.215 Billion

 

When WFC talks about CET1 ratio of 11.9% (1.9% beyond management's minimum, 2.9% beyond regulator's minimum), they're talking about Standardized numbers.

 

Say it another way, WFC is already working with operational risk of $380.139 Billion ($1250.215 Billion - $1189.464 Billion + $319.388 B).

 

[Spekulatius]

One of the things I got wrong when I contemplated on the Fed decree to limit the size of WFC’s balance sheet is what the Fed meant with the issues in WFC “risk control”. I took it that in addition to three obvious issues with managment oversite to be aware of the fake account creation, they possibly WFC’s managment Control regarding underwriting may have been compromised. This does not seem to be the case

The indications from the Fed stress tests, which WFC passed with flying colors, and the recent talk from Powell indicate that the sole issue seems to be that management was not aware (or claim they were not aware :o) of the fake account creation. So WFC has one large issue to deal with, not multiple one. If in fact WFC underwriting culture had gone to hell, this stock would be uninvestible. As it stands, we have imo a good bank with warts. I think this is fixable and that’s  why I bought some shares recently.

[Guest Schwab711]

2.  For both WFC and BAC, Standardized Approach is governing.  Operational risk is part of Advanced Approach RWA. 

 

For WFC, please refer to this link

https://www08.wellsfargomedia.com/assets/pdf/about/investor-relations/basel-disclosures/2018-third-quarter-pillar-3-disclosure.pdf

 

As of 9/30/2018

Advanced Approach RWA = $1189.464 Billion (includes $319.388 Operational Risk)

Standardized Approach RWA = $1250.215 Billion

 

When WFC talks about CET1 ratio of 11.9% (1.9% beyond management's minimum, 2.9% beyond regulator's minimum), they're talking about Standardized numbers.

 

Say it another way, WFC is already working with operational risk of $380.139 Billion ($1250.215 Billion - $1189.464 Billion + $319.388 B).

 

They go with standardized because sRWA is > aRWA. Only aRWA considers operational risk. Credit risk differs between the two methods for all sorts of reasons. Looking at operational risk in that way is not apples-to-apples.

 

I don't want to make this a BAC thread but I think BAC's nominal earnings have roughly matched total assets when you back out fines/settlements, despite interest rate tailwinds. It's a bit misleading to say asset growth doesn't matter but there are definitely other ways to grow earnings.

 

Agreed that WFC is still a great bank in many ways though.

[no_free_lunch]

Given the general carnage is the banking sector, is WFC still the best bet?  There are a lot of banks on sale that don't have as much controversy.  FITB for instance is cheaper on a PE/PB ratio, and there are many others to choose from.

[mwtorock]

Given the general carnage is the banking sector, is WFC still the best bet?  There are a lot of banks on sale that don't have as much controversy.  FITB for instance is cheaper on a PE/PB ratio, and there are many others to choose from.

 

Maybe WFC has been looked at so hard at very corner in their offices that the chance of more/big problems is actually less than other banks?

[Guest Schwab711]

Given the general carnage is the banking sector, is WFC still the best bet?  There are a lot of banks on sale that don't have as much controversy.  FITB for instance is cheaper on a PE/PB ratio, and there are many others to choose from.

 

We should start a separate thread but I like FITB a lot.

[walkie518]

https://finance.yahoo.com/news/wells-fargo-ceo-responds-elizabeth-205453816.html

 

this might be the only time I've ever agreed with Elizabeth Warren ... Sloan's hubris is surprising considering not only how poorly the stock has done but what's going on inside of the bank

[sleepydragon]

https://www.cnbc.com/video/2019/01/25/wells-fargo-ceo-tim-sloan-on-shutdown-earnings-returning-to-growth.html?__source=iosappshare%7Ccom.apple.UIKit.activity.CopyToPasteboard

[John Hjorth]

https://finance.yahoo.com/news/wells-fargo-ceo-responds-elizabeth-205453816.html

 

this might be the only time I've ever agreed with Elizabeth Warren ... Sloan's hubris is surprising considering not only how poorly the stock has done but what's going on inside of the bank

 

Yes, walkie,

 

It certainly tells something about the size of Mr. Sloan's ego [..."I'm the best" ...], but please take a look at the whole thing from other angles, too. Ms. Warren simply plays foul play. The regulators must be really annoyed by this, too. Ms. Warren tries to affect a decision process over which she has no formal power [conditions for the asset cap]. Her behavior is to me anti-business , and thereby to me destructive. This straightjacket is really hurting for WFC now - JPM and BAC are pulling away hard from WFC now - just take a look at the loan books developments in the banks. The board decides who is to fix the bank. I suppose the WFC chairman is really annoyed also.

[Spekulatius]

https://finance.yahoo.com/news/wells-fargo-ceo-responds-elizabeth-205453816.html

 

this might be the only time I've ever agreed with Elizabeth Warren ... Sloan's hubris is surprising considering not only how poorly the stock has done but what's going on inside of the bank

 

Yes, walkie,

 

It certainly tells something about the size of Mr. Sloan's ego [..."I'm the best" ...], but please take a look at the whole thing from other angles, too. Ms. Warren simply plays foul play. The regulators must be really annoyed by this, too. Ms. Warren tries to affect a decision process over which she has no formal power [conditions for the asset cap]. Her behavior is to me anti-business , and thereby to me destructive. This straightjacket is really hurting for WFC now - JPM and BAC are pulling away hard from WFC now - just take a look at the loan books developments in the banks. The board decides who is to fix the bank. I suppose the WFC chairman is really annoyed also.

 

It’s easy for her to crap on WFC, since the bank has virtually no presence in her political base in MA. She is trying to get airtime to support her political ambitions, imo.

[John Hjorth]

It’s easy for her to crap on WFC, since the bank has virtually no presence in her political base in MA. She is trying to get airtime to support her political ambitions, imo.

 

Yes, Spekulatius,

 

Distilled pure populism, at the cost of a valuable and important piece of the US financial infrastructure.

 

The way you phrased your comment also directed me again to a question, that I've so far been unable to find sufficient and satisfactory fine-meshed information about : Which banks are the major players in which states?

 

Any help & information on this would be much appreciated for my part.

[Guest MarkS]

It’s easy for her to crap on WFC, since the bank has virtually no presence in her political base in MA. She is trying to get airtime to support her political ambitions, imo.

 

Yes, Spekulatius,

 

Distilled pure populism, at the cost of a valuable and important piece of the US financial infrastructure.

 

The way you phrased your comment also directed me again to a question, that I've so far been unable to find sufficient and satisfactory fine-meshed information about : Which banks are the major players in which states?

 

Any help & information on this would be much appreciated for my part.

 

Hi John

 

This purports to show the largest bank, by value of deposits, for each state.  https://www.gobankingrates.com/banking/banks/what-is-biggest-bank-in-every-state/

It's not very detailed. So it may have.limited use.

[KJP]

On the FDIC's website you can search for, among other things, deposit market share by state.

[John Hjorth]

Thank you Mark & KJP,

 

I just realized that I was about to derail the WFC topic from WFC. I'll start a new topic later today in the General Discussion forum, quoting your posts. Thank you for your input here. It's much appreciated.

[Spekulatius]

You can run deposit market share reports on the FDIC website:

https://www5.fdic.gov/sod/sodMarketBank.asp?barItem=2

[John Hjorth]

Here is is a calculated 2017 - 2018 survey of earnings and other key metrics for the Big Four US banks.

[John Hjorth]

Wells Fargo News Release [January 30^th 2019] : Wells Fargo Issues Business Standards Report.

 

Link to the report.

[Rasputin]

https://www.sec.gov/Archives/edgar/data/72971/000119312519040983/d611876dsc13ga.htm

[Rasputin]

# of shares outstanding Dec 31 2017 : 4.89162 B

# of shares repurchased in 2018 : 0.37548 B

# of shares issued in 2018 : 0.06511 B

# of shares outstanding Dec 31 2018 : 4.5813 B

# of shares outstanding Feb 18 2019 : 4.5494 B

 

Cost to repurchase shares in 2018 : $20.633 B

Average cost per share : $54.95

[rb]

Tim Sloan is out.