WFC - Wells Fargo

[FCharlie]

I think they will cut to 15-20 cents. They probably don't have to cut this much but I would imagine a huge concern would be to not cut enough and then to have to cut it again later this year when their earnings continue to fall.

 

It's interesting that the market isn't really selling the stock down even after WFC confirms they will cut. Feels like it's priced in but you never know.

[Parsad]

I think they will cut to 15-20 cents. They probably don't have to cut this much but I would imagine a huge concern would be to not cut enough and then to have to cut it again later this year when their earnings continue to fall.

 

It's interesting that the market isn't really selling the stock down even after WFC confirms they will cut. Feels like it's priced in but you never know.

 

It's priced in.  The dividend cut will probably continue until 2nd or 3rd quarter next year, but will then increase most likely.  Cheers!

[sundin]

As per the new 'Extremely Adverse Scenario' test by the FED

 

 

BAC $37.1B:  ($17.1B ACL + $20B above reg min) vs Extreme Loan loss scenario of $47.2B

 

JPM $28.4B: ($25.4B ACL + $3B above reg min) vs Extreme Loan loss scenario of $64.4B

 

WFC $33.2B: ($12.2 ACL + $21B above reg min) vs Extreme Loan Loss scenario of $47.4B

[Astrea]

So having looked at the company-run stress test results for 2020, WFC would generate net losses of $23.1 billion (the Fed in its adverse stress test projected cumulative net losses of $16.6 billion I think).

 

That means its stockholders equity would fall to $139.6 bn and tangible book to $111.7 bn

 

So after the adverse scenario plays out, book value per share would be $34 and tangible bvps $27.2

 

Which suggests that we are able to buy WFC at a discount to bvps and tbvps even taking into account the consequences of the severely adverse scenario.

 

There must be some chances that this adverse scenario doesn't play out and something less horrid happens.

 

WFC then has a lot of expenses it can cut as it gets its house in order. Maybe the asset cap is lifted in the not too distant future, in time to capture an upswing in the economy (as opposed to what may have been mostly questionable rescue loans to date).

 

WFC has disappointed repeatedly over the past 4 years and I have to admit that my expectations are pretty battered. But I feel like that's more of an emotional response than a rational one and perhaps the market is in the same boat and therefore is offering us an attractive opportunity here.

 

If you can buy something that can earn a 12-15% normalised return on book two years out, you'd probably have something trading at 1.5x book. So about a double from today's price (all of this assuming the severe adverse scenario plays out).

 

 

 

 

 

 

[Parsad]

So having looked at the company-run stress test results for 2020, WFC would generate net losses of $23.1 billion (the Fed in its adverse stress test projected cumulative net losses of $16.6 billion I think).

 

That means its stockholders equity would fall to $139.6 bn and tangible book to $111.7 bn

 

So after the adverse scenario plays out, book value per share would be $34 and tangible bvps $27.2

 

Which suggests that we are able to buy WFC at a discount to bvps and tbvps even taking into account the consequences of the severely adverse scenario.

 

There must be some chances that this adverse scenario doesn't play out and something less horrid happens.

 

WFC then has a lot of expenses it can cut as it gets its house in order. Maybe the asset cap is lifted in the not too distant future, in time to capture an upswing in the economy (as opposed to what may have been mostly questionable rescue loans to date).

 

WFC has disappointed repeatedly over the past 4 years and I have to admit that my expectations are pretty battered. But I feel like that's more of an emotional response than a rational one and perhaps the market is in the same boat and therefore is offering us an attractive opportunity here.

 

If you can buy something that can earn a 12-15% normalised return on book two years out, you'd probably have something trading at 1.5x book. So about a double from today's price (all of this assuming the severe adverse scenario plays out).

 

+1!  I think one thing people underestimate as a net positive from the pandemic and zero rates, is that businesses that survive are going to come out far more efficient and competitive. I think that especially applies to the restaurant, retail, airline, travel industries, but most others, including finance, will be better businesses.

 

The other thing we are going to see quite a bit of I think in the 2nd half of this year and next year is M&A activity will surge.  With deregulation occurring I think this may be a great time for another financial institution to merge with WFC.  This to me seems to be a highly likely scenario.  Cheers!

[vince]

So having looked at the company-run stress test results for 2020, WFC would generate net losses of $23.1 billion (the Fed in its adverse stress test projected cumulative net losses of $16.6 billion I think).

 

That means its stockholders equity would fall to $139.6 bn and tangible book to $111.7 bn

 

So after the adverse scenario plays out, book value per share would be $34 and tangible bvps $27.2

 

Which suggests that we are able to buy WFC at a discount to bvps and tbvps even taking into account the consequences of the severely adverse scenario.

 

There must be some chances that this adverse scenario doesn't play out and something less horrid happens.

 

WFC then has a lot of expenses it can cut as it gets its house in order. Maybe the asset cap is lifted in the not too distant future, in time to capture an upswing in the economy (as opposed to what may have been mostly questionable rescue loans to date).

 

WFC has disappointed repeatedly over the past 4 years and I have to admit that my expectations are pretty battered. But I feel like that's more of an emotional response than a rational one and perhaps the market is in the same boat and therefore is offering us an attractive opportunity here.

 

If you can buy something that can earn a 12-15% normalised return on book two years out, you'd probably have something trading at 1.5x book. So about a double from today's price (all of this assuming the severe adverse scenario plays out).

 

Can you explain your reasoning of a 12-15% return on book translating into 1.5x book?

[rb]

So having looked at the company-run stress test results for 2020, WFC would generate net losses of $23.1 billion (the Fed in its adverse stress test projected cumulative net losses of $16.6 billion I think).

 

That means its stockholders equity would fall to $139.6 bn and tangible book to $111.7 bn

 

So after the adverse scenario plays out, book value per share would be $34 and tangible bvps $27.2

 

Which suggests that we are able to buy WFC at a discount to bvps and tbvps even taking into account the consequences of the severely adverse scenario.

 

There must be some chances that this adverse scenario doesn't play out and something less horrid happens.

 

WFC then has a lot of expenses it can cut as it gets its house in order. Maybe the asset cap is lifted in the not too distant future, in time to capture an upswing in the economy (as opposed to what may have been mostly questionable rescue loans to date).

 

WFC has disappointed repeatedly over the past 4 years and I have to admit that my expectations are pretty battered. But I feel like that's more of an emotional response than a rational one and perhaps the market is in the same boat and therefore is offering us an attractive opportunity here.

 

If you can buy something that can earn a 12-15% normalised return on book two years out, you'd probably have something trading at 1.5x book. So about a double from today's price (all of this assuming the severe adverse scenario plays out).

 

Can you explain your reasoning of a 12-15% return on book translating into 1.5x book?

Let's do some simple valuation:

 

P/B=(D/B)*(1+g)/(r-g)

 

Let's call g=4%, r=8%. If they make 12% on book that becomes:

 

P/B=0.08*1.04/0.04

P/B=2.08

 

[LC]

One thing to note is some coronavirus projections are worse then the SA scenario, particularly concerning unemployment.

[Junto]

The policy and stimulus is mitigating unemployment by effectively making a universal basic income. We will see what July brings but more is coming. Banks will not be taking the bulk of the losses this go around. The government is absorbing them with each stimulus package.

[CorpRaider]

One thing to note is some coronavirus projections are worse then the SA scenario, particularly concerning unemployment.

 

Yeah, but I think the severly adverse scenario is set in a video game where no government stimulus is undertaken, which is obviously already off the mark by several trillion dollars. 

 

Unrelated:  When I was looking through the estimated losses under all the scenarios I noted how close the BAC and WFC projections were. Almost like they said, "Meh, they are both de facto CLT headquartered national retail banks and we are already assuming no CARES Act, no fed programs, etc...they should be pretty much identical."

[LC]

That is true re Stress scenarios do not make assumptions on govt stimulus, good point.

[FCharlie]

So having looked at the company-run stress test results for 2020, WFC would generate net losses of $23.1 billion (the Fed in its adverse stress test projected cumulative net losses of $16.6 billion I think).

 

That means its stockholders equity would fall to $139.6 bn and tangible book to $111.7 bn

 

So after the adverse scenario plays out, book value per share would be $34 and tangible bvps $27.2

 

Which suggests that we are able to buy WFC at a discount to bvps and tbvps even taking into account the consequences of the severely adverse scenario.

 

There must be some chances that this adverse scenario doesn't play out and something less horrid happens.

 

WFC then has a lot of expenses it can cut as it gets its house in order. Maybe the asset cap is lifted in the not too distant future, in time to capture an upswing in the economy (as opposed to what may have been mostly questionable rescue loans to date).

 

WFC has disappointed repeatedly over the past 4 years and I have to admit that my expectations are pretty battered. But I feel like that's more of an emotional response than a rational one and perhaps the market is in the same boat and therefore is offering us an attractive opportunity here.

 

If you can buy something that can earn a 12-15% normalised return on book two years out, you'd probably have something trading at 1.5x book. So about a double from today's price (all of this assuming the severe adverse scenario plays out).

 

You just nearly perfectly summed up why WFC is one of the best deals in the market. The last four years have been nothing but one disappointment after another. As a consequence (and aided by large scale share repurchases) the market cap of the company has declined from around $300 billion to around $100 billion. But to anyone who is new to the stock, the opportunity is huge. Today, the stock is absurdly inexpensive relative to the earnings power of the assets under any normal environment. No one cares because all investors see in the future is further disappointment. Up next is the dividend cut, which will be followed by the company reporting losses for Q2.

 

I've been buying WFC slowly and steadily for the last few weeks. I don't know where it bottoms, but I know we're close. The Government has dumped cash on its citizens through stimulus and through unemployment money. Banks have said that the average customers checking account balances are 30% higher than normal. WFC is provisioning pretty heavily, but who doesn't pay their bills when their checking account balance is 30% higher than normal?

 

I also recall Wells Fargo saying the average LTV on their commercial real estate portfolio was about 70%. That's really not that aggressive and even if they have significant defaults in that portfolio, they may not lose that much money. What they do lose probably won't be enough to bring the stock below tangible book value and you are correct that investors can buy the stock today at a discount to tangible book value even after they take their hits.

 

Combine that with the reality that at some point they get their expenses under control, get the asset cap lifted, begin buying back stock again, and begin increasing the dividend again, and this stock could see a decade of outperformance starting really soon.

 

 

[ratiman]

 

 

 

Live shot of WFC investors

 

 

 

[UK]

https://www.wsj.com/articles/bond-markets-show-a-japanese-future-for-u-s-banks-11593763069

[sleepydragon]

Interesting take on CLOs especially on WFC's books.

 

https://www.theatlantic.com/magazine/archive/2020/07/coronavirus-banks-collapse/612247/?utm_source=pocket-newtab

 

this appears to be where it addresses the risk to the banks from CLOs (bold emphasis added):

 

Defenders of CLOs say they aren’t, in fact, a gamble—on the contrary, they are as sure a thing as you can hope for. That’s because the banks mostly own the least risky, top layer of CLOs. Since the mid-1990s, the highest annual default rate on leveraged loans was about 10 percent, during the previous financial crisis. If 10 percent of a CLO’s loans default, the bottom layers will suffer, but if you own the top layer, you might not even notice. Three times as many loans could default and you’d still be protected, because the lower layers would bear the loss. The securities are structured such that investors with a high tolerance for risk, like hedge funds and private-equity firms, buy the bottom layers hoping to win the lottery. The big banks settle for smaller returns and the security of the top layer.

 

 

The article calls into question statements from Mnuchin-Powell that the risk from CLOs is outside the banking system.  That view is largely consistent with the article's statement that the banks own the top layer of CLOs.

 

The blog post linked below is an excellent response to Partnoy's article. It's a shame that The Atlantic published this. It is exceptionally hyperbolic and not even in the ball park of accurate in terms of systemic risk.

 

https://nathantankus.substack.com/p/is-there-really-a-looming-bank-collapse

 

https://www.bloomberg.com/news/articles/2020-07-02/nathan-tankus-s-newsletter-subscribers-don-t-care-about-diplomas?sref=4ZGeBqkb&utm_campaign=socialflow-organic&cmpid=socialflow-facebook-business&utm_medium=social&utm_content=business&utm_source=facebook

 

 

[villainx]

Combine that with the reality that at some point they get their expenses under control, get the asset cap lifted, begin buying back stock again, and begin increasing the dividend again, and this stock could see a decade of outperformance starting really soon.

 

Is there something beside historic WFC brand that makes WFC more compelling than other bank? 

 

The only differentiation would be asset cap lifting, right?  Most other banks will expense control, renew buyback, increase dividends, etc., and some with earning ability not hampered by recent scandals/mismanagement. And this is without backdrop of how long covid with slow things down, and even how deep the dividend cut might turn out to be.

 

[rb]

Combine that with the reality that at some point they get their expenses under control, get the asset cap lifted, begin buying back stock again, and begin increasing the dividend again, and this stock could see a decade of outperformance starting really soon.

 

Is there something beside historic WFC brand that makes WFC more compelling than other bank? 

 

The only differentiation would be asset cap lifting, right?  Most other banks will expense control, renew buyback, increase dividends, etc., and some with earning ability not hampered by recent scandals/mismanagement. And this is without backdrop of how long covid with slow things down, and even how deep the dividend cut might turn out to be.

Risk management has been superior at WFC. As in their balance sheet tends to not blow up. I know this is subjective and you could say that well any other bank can pay for risk management. But it's not just numbers and models. With banks this tends to be part of culture that grows within an organization.

 

To put this another way, every time there's a banking crisis or some shady stuff going down there's a bunch of banks who's name with always pop up on the list. Wells has historically been one of those banks whose name doesn't pop up.

[dcollon]

To me, the best part of WFC was their low cost deposit base (historically).  They tended to have more non-interest bearing deposits as a percentage of total deposits compared to other large banks, which was a big advantage.  The "products per household", was also a solid concept that was taken too far...clearly.

 

I think going forward, it will be up to Charlie Scharf and his team (which is becoming very solid) to get WFC back on the right track culturally. 

 

 

[rb]

The low cost deposit base actually comes from being a heavy retail bank. And yes that business model is very profitable. If you take out Merrill Lynch B of A today would probably have similarly low costs. Same with TD in Canada.

 

TD and WFC are very comparable in being high touch retail banks. But I feel that Moynihan has done a great job at B of A turning it into one of these.

[nickenumbers]

I am also pulling for WFC.  It is a storied bank, and I own it directly and indirectly thru BRK.

 

Given all of the scandal they have undergone the last 2-3 years, their steady hand a share repurchase has been shrewd and IMPRESSIVE.  They were repurchasing shares at an unbelievable pace.

 

When everything turns around for WFC, that buybacks will be a huge value add to the remaining shareholders.

 

When will this all happen?  WHO KNOWS.  Maybe 6-18 months.  I dunno.

 

 

PS- Insiders have been buying for the last year not selling.

 

 

16 Mar 13:28

WFC

WELLS FARGO & COMPANY

NOSKI CHARLES H

Director 13 Mar 2020 Purchase 20,000 29.53 590,600 I

≡

16 Mar 13:13

WFC

WELLS FARGO & COMPANY

SCHARF CHARLES W

CEO & President 13 Mar 2020 Purchase 173,000 28.69 4,963,370 D

≡

03 Mar 14:08

WFC

WELLS FARGO & COMPANY

DALEY WILLIAM M

Vice Chairman - Public Affairs 28 Feb 2020 Purchase 5,600 40.99 229,544 I

≡

03 Mar 14:08

WFC

WELLS FARGO & COMPANY

DALEY WILLIAM M

Vice Chairman - Public Affairs 28 Feb 2020 Purchase 5,500 40.99 225,445 I

 

[CorpRaider]

Yeah the cheap money that grows over time even in the face of scandal, dominant distribution network (and related data), better asset/income generation business mix, superior scale (for that kind of bank) and simplicity ain't a bad combo.  It is obviously more valuable in an environment where the use of money (whatever we are using at that time) has some value.  A lot of that applies to USB too, imop.

 

Agree on TD. Pretty clear Clark and co noticed and planned to emulate Wells. Plus you will own 10% of SCHW after the deal closes (also they kind of got luck AF with timing of sale).  I wanna buy some, but am skeered of Canadian RE; they are due for a BAD beat imop (bullish on economy long term, especially if they maintain better immigration policies).  TD does seem cheaper than during GFC tho on some metrics.  Would prefer the Big Short guy Eisman was not short.

 

Memba when we were buying BAC at .60x TBV in 2011 and this was like 1.5?

 

 

[Parsad]

The low cost deposit base actually comes from being a heavy retail bank. And yes that business model is very profitable. If you take out Merrill Lynch B of A today would probably have similarly low costs. Same with TD in Canada.

 

TD and WFC are very comparable in being high touch retail banks. But I feel that Moynihan has done a great job at B of A turning it into one of these.

 

Yes, Moynihan does not get the credit he deserves.  He stick-handled BOA from has-been into a premier American bank just a tiny notch behind JPM.  Arguably, the most important banking CEO in the last decade, because things could have gone very wrong with BOA. 

 

Very few in the hierarchy wanted him as CEO, because he was not charismatic, but he simply put his thick, Irish, head down and worked hard.  I don't like excessive compensation for executives, but Moynihan deserved every penny!  Cheers!

[ratiman]

With gold hitting new highs and banks like WFC hitting new lows, you have to wonder if the future looks a lot like the European banks. If the Fed maintains a flat yield curve and keeps on issuing trillions of debt (which has to be the baseline scenario), it will be hard for banks to make money. Banks basically move with the yield curve and we could be in for years with very little NIM for the banks. With WFC barely managing to keep it's head above the critical $24 level, WFC could sink below where it was 13 years ago. If WFC is such a great bank how come it hasn't managed to move the share price in 13 years? Yes I'm trolling but why hop on a horse running in the wrong direction?

[Ballinvarosig Investors]

Given all of the scandal they have undergone the last 2-3 years, their steady hand a share repurchase has been shrewd and IMPRESSIVE.  They were repurchasing shares at an unbelievable pace.

Doesn't seem so shrewd to me. The vast majority of shares were repurchased at about $50, the share price today is less than half that. What's worse is that the share repurchase program is actually suspended at the moment, so no shares will be repurchased at these low prices.

 

Don't get me wrong though, Wells does looks cheap, but even before covid, it looked a bit like it was on the ropes (Q3+Q4 of last year were not good quarters). Q1 of this year was bad, Q2 will also be bad. The momentum of the business here does not look good, so I've swerved it and decided to buy Bank of America. It has a similar valuation, but doesn't have the Wily E. Coyote, falling off a precipice feel that Wells does with its recent earnings and revenue. With that said, Charles Scharf could be the guy to turn this thing around. Would not bet against him, but BAC seems the slightly safer bet right now.

[sleepydragon]

Given all of the scandal they have undergone the last 2-3 years, their steady hand a share repurchase has been shrewd and IMPRESSIVE.  They were repurchasing shares at an unbelievable pace.

Doesn't seem so shrewd to me. The vast majority of shares were repurchased at about $50, the share price today is less than half that. What's worse is that the share repurchase program is actually suspended at the moment, so no shares will be repurchased at these low prices.

 

Don't get me wrong though, Wells does looks cheap, but even before covid, it looked a bit like it was on the ropes (Q3+Q4 of last year were not good quarters). Q1 of this year was bad, Q2 will also be bad. The momentum of the business here does not look good, so I've swerved it and decided to buy Bank of America. It has a similar valuation, but doesn't have the Wily E. Coyote, falling off a precipice feel that Wells does with its recent earnings and revenue. With that said, Charles Scharf could be the guy to turn this thing around. Would not bet against him, but BAC seems the slightly safer bet right now.

 

WFC looks somewhat undervalued on P/B or P/E basis compared to BAC/JPM/UBS.

But seems to me extremely undervalued if you look at Mktcap/Total Asset.