WFC - Wells Fargo

[CorpRaider]

Like $8 I think.  I wouldn't overweight DJCO on its own, but he also pounded the table for Wells either at last real annual meeting and he is "aware" of opportunity cost analysis and the impact on the decision to hold a stock....also he blew POSCO the FK out of the DJCO portfolio a year or two ago, so it's not like he's not paying attention.

[blainehodder]

The biggest problem I've had with banks is general is: can you honestly say you know what's on the balance sheet? The income statement always tends to look good until the day when they need to write-off the accumulated sh&t on the balance sheet. Then they start the process all over again.

 

The straight answer is no. You can look at business practices, leverage, and earnings, but you can't really know what random gambles expose them to. They are certainly black boxes compared to "normal" businesses and you need to build a discount in for that, and trade them with that in mind. At least that is my opinion.

[RadMan24]

Thoughts on potential GS tie up? PNC is also with that dry powder, but a WFC-GS tie up would be an interesting deal. You got two squids together, could make a tuna.

 

https://www.barrons.com/articles/goldman-sachs-and-wells-fargo-will-never-join-forces-heres-why-51589469240

[mwtorock]

i have a sense that you guys may have again called a bottom of WFC?  ;)

[tng]

We have to keep in mind that when Buffett and Munger invested in the banks, that was a completely different situation. The bailout was already confirmed and the government gave very favorable terms to the banks (they could have carved up the shareholders, which they learned to do later to AIG). There was very little existential risk and Buffett and Munger recognized that. Right now I think WFC is cheap, but there is a very real existential risk to the shareholders. If we stay in lockdown for longer than expected, all the banks are in danger and any government bailout will look more like what happened to AIG.

[DooDiligence]

We have to keep in mind that when Buffett and Munger invested in the banks, that was a completely different situation. The bailout was already confirmed and the government gave very favorable terms to the banks (they could have carved up the shareholders, which they learned to do later to AIG). There was very little existential risk and Buffett and Munger recognized that. Right now I think WFC is cheap, but there is a very real existential risk to the shareholders. If we stay in lockdown for longer than expected, all the banks are in danger and any government bailout will look more like what happened to AIG.

 

Oranges to a rotten apple.

 

AIG was an irresponsible operator.

[wabuffo]

We have to keep in mind that when Buffett and Munger invested in the banks, that was a completely different situation.  The bailout was already confirmed and the government gave very favorable terms to the banks (they could have carved up the shareholders, which they learned to do later to AIG).  There was very little existential risk and Buffett and Munger recognized that.

 

I don't think this is correct.  Buffett didn't buy any banks during the GFC.  Munger bought WFC and USB but in late Feb/early March 2009.

 

Bank common stocks didn't hit rock bottom until early March 2009.  Don't forget, the Federal Government/US Treasury were still quite worried about bank balance sheets.  Early 2009 was when Geithner introduced his bank stress tests.  There were serious worries about the outcomes from these tests.  Everything from bank nationalization by the US Treasury to very large mandates for equity capital raising by the banks were in the headlines at that time.

 

IIRC, Buffett and Munger began to be quite vocal in the press about WFC, in particular.  Buffett was quoted publicly that he didn't think WFC needed any more capital and that Buffett performed his own "stress test".  Munger also was quoted that if he could put all his money in one stock it would be WFC.  They were quite worried about dilution (particulary because bank common share prices were cratering in all of the uncertainty about what the US Treasury was going to order banks to do).

 

wabuffo

[Astrea]

WFC looks very tempting. But....

 

What if the interest rates stay at 0% for 5 years going forward as it happened in Japan & Europe? How would WFC or BAC perform under that scenario? Also what about the loan losses for the next 3 years? I am sure the reserves will go up significantly in the 2nd quarter. I have a difficult time predicting any sort of "normalized" earnings for the next 5 years.

 

Rates could stay at 0% and the curve can rise - banks made plenty of money at low rates in recent years.

 

Wells Fargo is posting a dividend yield of close to 10%.

 

Munger swooped in to buy WFC when it was around $8 or so dollars, a "no brain'r" What's that kind of price today? $15 - if you account for the growth in economy and customer base?

 

As at 31 Dec 2008, book value per share was $16.15 so he bought at around 50pc book. Today, book value per share is $41 so, all else equal, we're getting close to no-brainer territory? Of course, all else is not equal as we're dealing with an unpredictable novel virus.

 

Also what about the 2019 Fed stress test results?

 

That scenario contemplated a two-year recession with unemployment peaking at 10%, the economy contracting 8%, home prices falling 26%, commercial real estate falling 35%, stock prices down 50% and yields on the 10-year Treasury at 80 basis points.

 

Under such conditions, Wells Fargo projected net losses before taxes of $17 billion, which would reduce book value by about 10%.

 

But then maybe we're in for something a lot worse than this over the next few years. That's the hard part to figure out but hopefully as we learn more about the virus, we'll be able to start putting probabilities on possible outcomes.

 

 

 

 

 

 

 

 

[physdude]

WFC looks very tempting. But....

 

What if the interest rates stay at 0% for 5 years going forward as it happened in Japan & Europe? How would WFC or BAC perform under that scenario? Also what about the loan losses for the next 3 years? I am sure the reserves will go up significantly in the 2nd quarter. I have a difficult time predicting any sort of "normalized" earnings for the next 5 years.

 

Rates could stay at 0% and the curve can rise - banks made plenty of money at low rates in recent years.

 

Wells Fargo is posting a dividend yield of close to 10%.

 

Munger swooped in to buy WFC when it was around $8 or so dollars, a "no brain'r" What's that kind of price today? $15 - if you account for the growth in economy and customer base?

 

As at 31 Dec 2008, book value per share was $16.15 so he bought at around 50pc book. Today, book value per share is $41 so, all else equal, we're getting close to no-brainer territory? Of course, all else is not equal as we're dealing with an unpredictable novel virus.

 

Also what about the 2019 Fed stress test results?

 

That scenario contemplated a two-year recession with unemployment peaking at 10%, the economy contracting 8%, home prices falling 26%, commercial real estate falling 35%, stock prices down 50% and yields on the 10-year Treasury at 80 basis points.

 

Under such conditions, Wells Fargo projected net losses before taxes of $17 billion, which would reduce book value by about 10%.

 

But then maybe we're in for something a lot worse than this over the next few years. That's the hard part to figure out but hopefully as we learn more about the virus, we'll be able to start putting probabilities on possible outcomes.

 

In that scenario, the overall stock market would probably do a lot worse than WFC from these price levels. Maybe a pair trade of some sort?

[HalfMeasure]

WFC looks very tempting. But....

 

What if the interest rates stay at 0% for 5 years going forward as it happened in Japan & Europe? How would WFC or BAC perform under that scenario? Also what about the loan losses for the next 3 years? I am sure the reserves will go up significantly in the 2nd quarter. I have a difficult time predicting any sort of "normalized" earnings for the next 5 years.

 

Rates could stay at 0% and the curve can rise - banks made plenty of money at low rates in recent years.

 

Wells Fargo is posting a dividend yield of close to 10%.

 

Munger swooped in to buy WFC when it was around $8 or so dollars, a "no brain'r" What's that kind of price today? $15 - if you account for the growth in economy and customer base?

 

As at 31 Dec 2008, book value per share was $16.15 so he bought at around 50pc book. Today, book value per share is $41 so, all else equal, we're getting close to no-brainer territory? Of course, all else is not equal as we're dealing with an unpredictable novel virus.

 

Also what about the 2019 Fed stress test results?

 

That scenario contemplated a two-year recession with unemployment peaking at 10%, the economy contracting 8%, home prices falling 26%, commercial real estate falling 35%, stock prices down 50% and yields on the 10-year Treasury at 80 basis points.

 

Under such conditions, Wells Fargo projected net losses before taxes of $17 billion, which would reduce book value by about 10%.

 

But then maybe we're in for something a lot worse than this over the next few years. That's the hard part to figure out but hopefully as we learn more about the virus, we'll be able to start putting probabilities on possible outcomes.

 

Anyone who followed WFC in 2008 have context on how different the composition/quality of BV is now vs. then? I'm thinking both in terms of regulatory changes (i.e. significantly more capital/less leverage today) but then also the fact that there was a housing crash in 2008 and the mortgage market plumbing had some issues.

[sleepydragon]

How exposed WFC to the real estate market in California, especially the commercial real estate? It’s a big bubble there popping right now

[Astrea]

How exposed WFC to the real estate market in California, especially the commercial real estate? It’s a big bubble there popping right now

 

From their latest Q, it seems 4% of loans are commercial real estate in California and 13% are first mortgage residential in California

[sundin]

Between 2007 - 2009 WFC had writeoffs about $29.5 billion.

 

Currently, WFC has ~ $12 billion in provisions. Tier 1 equity capital is at 10.67% meaning it has another $21 billion to absorb in hitting the 9% regulatory minimum from here. Already it has enough in reserve and capital to take hit of the GFC writeoffs.

 

This is also assuming the bank operates at breakeven for the next couple of quarters.

 

[stockkevin]

Between 2007 - 2009 WFC had writeoffs about $29.5 billion.

 

Currently, WFC has ~ $12 billion in provisions. Tier 1 equity capital is at 10.67% meaning it has another $21 billion to absorb in hitting the 9% regulatory minimum from here. Already it has enough in reserve and capital to take hit of the GFC writeoffs.

 

This is also assuming the bank operates at breakeven for the next couple of quarters.

 

Curious how you came up with another $21B in charge offs would get you to hit the 9% reg minimum. I did get a similar calculation. Quick back of the envelope, they had about $3.8B of additional charge offs in Q1 and that took the Tier 1 equity capital from 11.1% to 10.7% or approx 0.4%. Another 1.7% down would imply ~$16B?

[erdospi]

What happens to banks NIMs in this environment? And how does that impact Wells earnings power?

[stockkevin]

What happens to banks NIMs in this environment? And how does that impact Wells earnings power?

 

Lower interest rates = NIM and thereby lower earnings power. Hard to see the government increasing interest rates given the pandemic.

[erdospi]

So if the NIMs are compressed to 200bps what’s WFC normalized earnings going forward?

[sundin]

Between 2007 - 2009 WFC had writeoffs about $29.5 billion.

 

Currently, WFC has ~ $12 billion in provisions. Tier 1 equity capital is at 10.67% meaning it has another $21 billion to absorb in hitting the 9% regulatory minimum from here. Already it has enough in reserve and capital to take hit of the GFC writeoffs.

 

This is also assuming the bank operates at breakeven for the next couple of quarters.

 

Curious how you came up with another $21B in charge offs would get you to hit the 9% reg minimum. I did get a similar calculation. Quick back of the envelope, they had about $3.8B of additional charge offs in Q1 and that took the Tier 1 equity capital from 11.1% to 10.7% or approx 0.4%. Another 1.7% down would imply ~$16B?

 

Check the top of pg 46 and RWA ... https://www08.wellsfargomedia.com/assets/pdf/about/investor-relations/sec-filings/2020/first-quarter-10q.pdf

 

 

[jgyetzer]

So if the NIMs are compressed to 200bps what’s WFC normalized earnings going forward?

 

It’s extremely simplistic, but if you plug NIM 2% into the 2019 10K and assume current earning assets remain the same and with no reduction in non-interest expenses you’ll get about $12B reduction in earnings compared to 2019.

 

That leaves about $7.5B earnings on a market cap of $100B.  You can adjust for any number of other possibilities on the upside or downside.  The rough contours of that scenario make this look pretty cheap to me.

[erdospi]

200bps seems like it is not a drastic compression for a downside scenario. 13x’s earnings is cheap in the range of outcomes?  What if NIMs are compressed to 100 to 150bps? and/or return of capital is halted? And/or real losses increase (not just CECL estimates)?

[jgyetzer]

The 200 bps NIM came from your post.  Could it be lower?  Sure.  Costs could also be brought down.  Non-interest income can rise.  Interest rates CAN go up even though they have not recently.  Nobody can argue that the range of possible outcomes isn’t wide.  I just think that at $100B market cap the market is not expecting much. 

 

How did Pabrai put it?  High uncertainty does not equal high risk? 

[erdospi]

Are the outcomes that wide? I don’t think they are on the NIMs.

 

The US bank NIMs have been in a downward trend  since 1994 https://fred.stlouisfed.org/series/USNIM

I find it hard to see that trend changing much in this environment.

 

I was guessing 200bps would be a optimistic NIM for WFC. EU bank NIMs used to be reported on FRED until 2015, I think they were ~150bps then.  EU banks have more leverage, zombie loans, more brokered deposits, and other differences so definitely not a great comparison.

 

I’m just having a very difficult time seeing those NIMs not getting compressed to at least 200bps. Wells will likely cut a lot of bloat and hopefully grow assets organically or via acquisitions to earn more in spite of my guess on lower NIMs and depending on ones view of COVID-19 they could take a chunk of losses on that too.  Non interest income seems tough to increase at present with competition for deposits. 

 

The US banks are generally over capitalized but if the government doesn’t let them return the capital then they are a like regulated utility with a significantly lower ROE or potentially worse they end up like the Japanese zombie banks.

 

It doesn’t seem to be a no brainer for the risks at 13x’s or a potentially higher multiple of normalized earnings and seems likely that it is at best 7x’s in a fairly optimistic scenario. 

 

Anyone have likely scenarios where WFC or US banks in general can sustain or hold current NIMs? Or point out the flaws in my thoughts on NIM compression?. Maybe there is some deflation hedge in there besides a few years of refinancing  income?

 

[fareastwarriors]

Wells Fargo, worried about defaults, stops making loans to most independent car dealerships

 

https://www.cnbc.com/2020/06/02/wells-fargo-cuts-back-from-making-loans-to-independent-car-dealerships.html

[Peregrine]

Wells Fargo, worried about defaults, stops making loans to most independent car dealerships

 

https://www.cnbc.com/2020/06/02/wells-fargo-cuts-back-from-making-loans-to-independent-car-dealerships.html

 

They still have the asset cap which makes them extra judicious about adjudicating loans.

[meiroy]

 

 

The key here is that independent dealers mostly sell used cars as is noted in the article and used car prices have plunged.

 

Anyhow, I thought the cap was temporarily lifted?