WFC - Wells Fargo

[Edward]

For context, WFC traded at a low ~1.01x TBV during the crisis, at roughly 1.2x today....

The NIM was way higher back then. It is trending down since then, which means you are stuck in an investment making a 10-12% ROE going down. As such it is actually worth book value, maybe.

 

When long term rates reverse then we can talk about it being worth above book value. But it might hit 7-8% ROE in the near future at which point it is worth less than book value.

[rb]

For context, WFC traded at a low ~1.01x TBV during the crisis, at roughly 1.2x today....

The NIM was way higher back then. It is trending down since then, which means you are stuck in an investment making a 10-12% ROE going down. As such it is actually worth book value, maybe.

 

When long term rates reverse then we can talk about it being worth above book value. But it might hit 7-8% ROE in the near future at which point it is worth less than book value.

Yea, I don't see banking at 7-8% ROE anywhere in the near future.

[Edward]

Regardless of the precise number, I personally see no sense investing in a highly leveraged (1:10) business generating a 10% ROE unless I'm getting a very, very big discount.

 

Just would rather be invested in better businesses frankly. Or Berkshire if I'm feeling lazy, which is incidentally available at a bargain price right now.

[John Hjorth]

I really don't think the biggest issue here is whether its franchise is permanently damaged;

the biggest issue is whether we will go into a permanent low interest environment (in the extreme case - 0 or negative interest like in Europe)

, and I am not sure what kind of valuation we should give to BAC, WFC in such an environment

Are they still worth today's price?

 

Plato,

 

I [, me, personally, now living in a Northern European state for several years, with negative interest rates] think this line of thinking is somewhat flawed. Negative interest rates on deposits are only a part of the whole equation. In short, it about Net Interest Margin, not the interest level.

 

NIM is correlated with absolute risk free interest rates. I don’t know any country they had high NIM and low or zero risk free rates. Even right now, when you look at the NIM trends of all major US banks, you can see that they have been trending down since the rate cut. The current interest rate trends in the US clearly forebodes lower profitability going forward for quite some time for banks.

 

As you know, Spekulatius, I'm a citizen in a Northern European nation, with perhaps "the most negative interest rates in the world". I'm putting " " "s around some of the written, because people tend to mix/confuse Danish mortgage bond rates with bank deposits rates.

 

As I see things simplified [dearly], every bank stand on five pillars with regard to earnings :

 

1. Result of market operations on securities on the banks own book and balance sheet,

2. Result of market operations on securities owned by the customers of the bank [fees],

3. Payment services [fees],

4. Income [net of losses] from lending activity, &

5. Income/loss from taking deposits from customers [relative to the Central Bank deposit rate]

 

- - - o 0 o - -

 

Here the whole thing has been changing at warp speed with regard to bullet 5, to me, basically initiated by Danske Bank a few weeks ago, basically everyone else after that following suit. [kab60 has posted about it recently in another topic.]

 

I will not be surprised to see going forward Danish negative bank interest rates below the Danish central bank rate for bank deposits from Danish banks. [in casu : below minus 0.75 %]

 

Here, NIM is compressed, because the competition for lending is extremely fierce for the good customers [with low lending demand & very active supervision from the Danish FSA, to keep things in check], while every Danish bank is actively trying to get rid of weak customers.

[griezeman23]

For context, WFC traded at a low ~1.01x TBV during the crisis, at roughly 1.2x today....

The NIM was way higher back then. It is trending down since then, which means you are stuck in an investment making a 10-12% ROE going down. As such it is actually worth book value, maybe.

 

When long term rates reverse then we can talk about it being worth above book value. But it might hit 7-8% ROE in the near future at which point it is worth less than book value.

Yea, I don't see banking at 7-8% ROE anywhere in the near future.

 

Even if it earns just 8% ROE and achieves 2% growth, with the 10-year at 1% (basically) and a WACC of 6%, this gets you an implied P/B of 1.5x... ROE last year was still 10.4%, despite the kitchen sink Q4.

 

EDIT: Won't disagree BRK is more attractive!

[HalfMeasure]

Curious to hear anyone's thoughts on how the 50bps cut yesterday morning impacts the thesis across big banks, but especially for WFC. Any thoughts?

[kab60]

I think the longterm trend in rates looks pretty bad for US banks, and they trade at a large premium to European peers. It nags me about my large Berkshire stake. Think I'd rather own Barclays, which is targetting 10 pct ROE and on an improving trajectory at a fat discount to book, with a large yield instead of paying a premium to book and hope for NIM to not get worse in the US. Core Barclays (UK) I believe has a midteen ROE plus activist pushing for less focus on IB. Obviously noone knows where rates are going, but the trend looks bad, and if there's actually a recession in the US it's not hard to imagine negative yields.

[CorpRaider]

Rates might go to zero.  It would hurt bank earnings.  Seems to me like this is known.

 

If I could predict interest rates with accuracy I would be blissfully unaware of this conversation whilst chilling on my private island.

 

For all I know, the CV could wipe out most/a bunch of the boomers and their future claims on society (via social welfare programs). Then, their higher-paying jobs move to younger hands and there's a labor shortage; the primary demographic arguments for the lower for longer theory are kaput.

 

I hear you about the Euro banks, which ones do you like?  I tried to like LLoyds given the oligopoly in the high street banks and the moaty deposit share, but man I listened to their CEO give a few talks (maybe it was a language barrier...but that doesn't help me a lot given their stated market focus)...and decided to pass.  UBS I was kind of looking at but then I keep reading about all these horribly dumb things they did with LTCM and in the GFC and they have you know even more non-economic interests than U.S. banks imop.  Decided just to hit the EAFE index, has lots of banks already.

[mcliu]

I think the longterm trend in rates looks pretty bad for US banks, and they trade at a large premium to European peers. It nags me about my large Berkshire stake. Think I'd rather own Barclays, which is targetting 10 pct ROE and on an improving trajectory at a fat discount to book, with a large yield instead of paying a premium to book and hope for NIM to not get worse in the US. Core Barclays (UK) I believe has a midteen ROE plus activist pushing for less focus on IB. Obviously noone knows where rates are going, but the trend looks bad, and if there's actually a recession in the US it's not hard to imagine negative yields.

 

I think US banks are in a much better position than European banks. There's still room on the liabilities side to cut rates to maintain NIM and expand balance sheet on the asset side to maintain NII. US bulge brackets have also dominated capital markets business as European banks retrench.

 

Europe has too much leverage and refuses to massively restructure, there's not many levers left. US also has tailwind of better demographics, energy independence, improved trade policies.

[kab60]

Well, it seems like few expected rates to head to zero in a US economy with almost full employment, but yeah, who knows what happens. I don't own any banks, but I'm intrigued by Barclays. Actually like that they left the EU. Core UK biz looks good, they have a large credit card and merchant acquiring biz and there's optionalty from slimming down IB (not gonna happen on this CEO's watch, but IB is starting to perform okay'ish). CEO is former right hand of Jamie Dimon, and there's pressure from an activist. Either they perform, or I expect them to return more capital. Dividend already pretty fat.

[rb]

The European Banks are not cheap because of rates. European banks are cheap because their business is crap. There's way more competition in Europe and they're balance sheets are filled with crap.

 

Take a real "winner" over there - UniCredit. In the current environment their NI margin was 130. Their ROTE was 9.2% but they have a lot of NPLs and a higher tax rate. Stateside you replicate the interest rate environment you won't go to that level of NI margin due to higher competition. In 2019 BAC had ROTE of 14%. WFC was at 11.7 with their current troubles and that weird Q4.

 

Basically you normalize for all the variables, blah, blah, blah and you get that in an interest environment similar to Europe they probably earn an ROTE of around 12%. This is nowhere near scary. Especially given current valuations for banks.

[Guest Schwab711]

The European Banks are not cheap because of rates. European banks are cheap because their business is crap. There's way more competition in Europe and they're balance sheets are filled with crap.

 

Every country with negative rates has seen a contraction in real GDP over a multi-year period. I think Denmark is the only country that is near surpassing it's former peak. The EU is at 0% and obviously there are many countries with varying degrees of economic problems.

 

Prior to the GFC, many of the EU banks had 10%+ ROE and ~20% ROTCE. I'm not sure declining returns for Euro banks can be primarily attributed to competition.

[LC]

Prior to the GFC, many of the EU banks had 10%+ ROE and ~20% ROTCE. I'm not sure declining returns for Euro banks can be primarily attributed to competition.

 

If you look at performance of NA vs EU banks pre-crisis, results were similar. Performance after the crisis was widely divergent, presumably due to EU's zero/negative rate policies. This is my interpretation at least.

[HalfMeasure]

Every country with negative rates has seen a contraction in real GDP over a multi-year period. I think Denmark is the only country that is near surpassing it's former peak. The EU is at 0% and obviously there are many countries with varying degrees of economic problems.

 

But isn't the causality the other way around? E.g. the real GDP environment is why rates are negative as the CB is trying to stimulate the economy to no avail.

[Spekulatius]

The European Banks are not cheap because of rates. European banks are cheap because their business is crap. There's way more competition in Europe and they're balance sheets are filled with crap.

 

Every country with negative rates has seen a contraction in real GDP over a multi-year period. I think Denmark is the only country that is near surpassing it's former peak. The EU is at 0% and obviously there are many countries with varying degrees of economic problems.

 

Prior to the GFC, many of the EU banks had 10%+ ROE and ~20% ROTCE. I'm not sure declining returns for Euro banks can be primarily attributed to competition.

 

Even before the financial crisis, the ROA was crap. NIM was generally below 2% already. They only reason they made decent ROE because they used lots of leverage. I do agree that the EU markets are different, but Ireland, the UK and some Nordic countries  have structurally less competition than the US. So part of the difference is interest rates, the other part is competition.

 

I think I am most bullish on British banks. They keep their own currency so they may avoid some Euro foibles. For sure the UK banks are cheap.

 

I think the that the US and the EU interest rates converge means that Bank NIM are going to converge too, this is a directional assessment and dozens mean we get to the same end result.

 

Stock markets are mostly about getting direction right. I would stay away from US Bank stocks now, unless they start to trade at considerable discounts to tangible book.

[elliott]

I hear you about the Euro banks, which ones do you like?

 

have you checked Svenska Handelsbanken?

[John Hjorth]

I hear you about the Euro banks, which ones do you like?

 

have you checked Svenska Handelsbanken?

 

CorpRaider & elliott,

 

Well, that's a "SEK"-bank, but never mind. [ : - ) ] I personally would add Ringkøbing Landbobank A/S [RILBA.CPH].

 

- - - o 0 o - - -

 

Posted with the best intentions, and not the intention to derail the topic too far away from WFC.

[rb]

The European Banks are not cheap because of rates. European banks are cheap because their business is crap. There's way more competition in Europe and they're balance sheets are filled with crap.

 

Every country with negative rates has seen a contraction in real GDP over a multi-year period. I think Denmark is the only country that is near surpassing it's former peak. The EU is at 0% and obviously there are many countries with varying degrees of economic problems.

 

Prior to the GFC, many of the EU banks had 10%+ ROE and ~20% ROTCE. I'm not sure declining returns for Euro banks can be primarily attributed to competition.

I'm sorry but that's just flat out wrong.

 

Here's EU GDP:

https://fred.stlouisfed.org/series/CPMNACSCAB1GQEU28

 

Here's Germany and France, both with negative rates:

 

https://fred.stlouisfed.org/series/CLVMNACSCAB1GQFR

 

https://fred.stlouisfed.org/series/CLVMNACSCAB1GQDE

 

The only majour economy in the EU to not surpass its former peak is Italy, which doesn't have negative rates. Denmark is well above its former peak, hell even Portugal surpassed its former peak.

 

Prior to the GFC the EU banks were printing good numbers because they used way more leverage and were filling their balance sheets with crap.

 

 

[CorpRaider]

I hear you about the Euro banks, which ones do you like?

 

have you checked Svenska Handelsbanken?

 

I haven't.  Thanks!

[plato1976]

At the speed of the recent plummeting, it will go below tangible book value soon

could be an opp?

 

For context, WFC traded at a low ~1.01x TBV during the crisis, at roughly 1.2x today....

The NIM was way higher back then. It is trending down since then, which means you are stuck in an investment making a 10-12% ROE going down. As such it is actually worth book value, maybe.

 

When long term rates reverse then we can talk about it being worth above book value. But it might hit 7-8% ROE in the near future at which point it is worth less than book value.

Yea, I don't see banking at 7-8% ROE anywhere in the near future.

 

Even if it earns just 8% ROE and achieves 2% growth, with the 10-year at 1% (basically) and a WACC of 6%, this gets you an implied P/B of 1.5x... ROE last year was still 10.4%, despite the kitchen sink Q4.

 

EDIT: Won't disagree BRK is more attractive!

[Guest Schwab711]

The European Banks are not cheap because of rates. European banks are cheap because their business is crap. There's way more competition in Europe and they're balance sheets are filled with crap.

 

Every country with negative rates has seen a contraction in real GDP over a multi-year period. I think Denmark is the only country that is near surpassing it's former peak. The EU is at 0% and obviously there are many countries with varying degrees of economic problems.

 

Prior to the GFC, many of the EU banks had 10%+ ROE and ~20% ROTCE. I'm not sure declining returns for Euro banks can be primarily attributed to competition.

I'm sorry but that's just flat out wrong.

 

Here's EU GDP:

https://fred.stlouisfed.org/series/CPMNACSCAB1GQEU28

 

Here's Germany and France, both with negative rates:

 

https://fred.stlouisfed.org/series/CLVMNACSCAB1GQFR

 

https://fred.stlouisfed.org/series/CLVMNACSCAB1GQDE

 

The only majour economy in the EU to not surpass its former peak is Italy, which doesn't have negative rates. Denmark is well above its former peak, hell even Portugal surpassed its former peak.

 

Prior to the GFC the EU banks were printing good numbers because they used way more leverage and were filling their balance sheets with crap.

 

https://fred.stlouisfed.org/series/MKTGDPDKA646NWDB

 

I was looking at US dollars for some reason for Denmark, Japan, Switzerland, ect. You are right about local currency GDP growth.

 

Either way for EU, Im pretty sure the ECB overnight lending rate is non-negative (0%-0.25%). That's why I didn't bring up the names you did.

 

With EU bank returns, they are still quite levered. I don't understand how it's controversial to say bank returns will decline as rates decline. Aggregate bank returns ~= WACC. WACC is declining. Returns will be completed away.

[DooDiligence]

Maxine Waters WFC dirty laundry list

 

https://financialservices.house.gov/uploadedfiles/wells_fargo_staff_report_final_mm.pdf

[Guest eatliftinvestgolf]

Surprising timing for BoD resignations and a new chairman.

https://newsroom.wf.com/press-release/corporate-and-financial/elizabeth-duke-and-james-h-quigley-resign-wells-fargo-board

[Spekulatius]

Share are probably hitting tangible book ($33.5) today.

[wescobrk]

Share are probably hitting tangible book ($33.5) today.

 

I know this is a WFC thread but BAC isn't too far and JPM I'm sure will hit it soon.