WFC - Wells Fargo

[Shane]

Curious what board members might think of this criticism: by bringing in outsiders to right the ship, Wells Fargo is committing a common turnaround mistake.  I believe it was the book "How the Mighty Fall" or "Good to Great" by Jim Collins (I can't recall) where it was found that the successful turnaround usually had brought people from within up to fix the company.  Perhaps the idea is that if the corporate culture is so weak that there is nobody from inside who can satisfy the position and right the ship, that the job is too momentous to have a high probability of success.

 

Thoughts?

 

 

 

 

As a banker who has successfully turned around a bank and lived through a failed one,  I strongly believe in banking that outsiders are needed to shift the dynamic in a struggling banking organization. Maybe it is anchoring in prior views or truly mismanagement, an outside view and structure can bring failing strategies to light, institute new ones, and investing in strong strategies. The independence of prior problems and troubles allows for more flexible and new approaches to work through the major rocks needed to improve the company.

 

We will see how this turnaround progresses. I have no position in WFC but think it is trading cheap, but I am not convinced yet that they have a firm grasp on the problem and have presented a viable plan to solve given the regulatory challenges faced.

 

 

As someone who has been working with people and companies with Tribal Leadership now for almost 8 years, I can tell you that most failing strategies are a function of a culture not aligned with the strategies. Most consultants just do change management without any actual transformation and ontological work involved which is where the culture shift happens. Without ever having been in the company, I'd be 99% it's a culture issue and if the culture shifted, new strategies would be created naturally as a byproduct of that.

 

...this is the last bastion of low-hanging fruit alpha IMO outside of super tiny net-nets which will always have an advantage due to limits of position sizing.

 

The truth is I could with maybe 3 other people come in and make more of an impact in Wells Fargo in 1 month than they have in the last few years.

 

The level of amateur hour is funny but also kind of sad. When I work with people, they assume I'm just another consultant and then their world gets rocked within 1-2 days.

 

Did you just use this post as a platform to market yourself?

[John Hjorth]

Please let it go, Shane,

 

And please let Eric's post stand by it self [isolated, with "promotional intent "unintended""], because it contains a truth in itself, at least to me, personally.

[ratiman]

So Fed Governor is saying "raise capital" to all the banks while the worst of the banks is still paying dividends? Something here is gonna give.

 

[rb]

Yeah, well that particular Fed Governor is an idiot.

[CorpRaider]

BAC has reserved 9.88 billion over the last two quarters versus the 13.5 reserved by Wells, on a slightly bigger asset base.  I guess they are both at about 2% of reserves to total loans, so maybe who cares how they got there.

[erdospi]

Not sure why people aren’t worried about the NIM more than the provisions. That was quite the falloff.

[Spekulatius]

Not sure why people aren’t worried about the NIM more than the provisions. That was quite the falloff.

 

Yeah, I was looking at this too. The NIM trends for WFC and BAC are terrifying as they approach 2%. Combine this reduced earnings power with the potential for large losses from the loan book and you have a real problem.

[Junto]

Not sure why people aren’t worried about the NIM more than the provisions. That was quite the falloff.

 

Yeah, I was looking at this too. The NIM trends for WFC and BAC are terrifying as they approach 2%. Combine this reduced earnings power with the potential for large losses from the loan book and you have a real problem.

 

Deposits surged. Hard to employ such a massive influx of deposits judiciously in a quarter. 23% at BAC!?! That is some deposit growth. Their specific guidance was that they were not sure of the durability of the deposit base and I am total agreement and have done the same at my banks. Otherwise you get caught in a liquidity bind when it flows out as quick as it came in.

[Junto]

So Fed Governor is saying "raise capital" to all the banks while the worst of the banks is still paying dividends? Something here is gonna give.

 

 

There is no capital issue. Reserves are ~10%+ at money center banks on credit cards. Significantly up from 2019 and net charge offs remain similar. He is using scare tactics to keep the bankers conservative in their actions.

 

MS on the other hand is indicating today they should be increasing their dividend and their stock buyback program.

[Spekulatius]

Not sure why people aren’t worried about the NIM more than the provisions. That was quite the falloff.

 

Yeah, I was looking at this too. The NIM trends for WFC and BAC are terrifying as they approach 2%. Combine this reduced earnings power with the potential for large losses from the loan book and you have a real problem.

 

Deposits surged. Hard to employ such a massive influx of deposits judiciously in a quarter. 23% at BAC!?! That is some deposit growth. Their specific guidance was that they were not sure of the durability of the deposit base and I am total agreement and have done the same at my banks. Otherwise you get caught in a liquidity bind when it flows out as quick as it came in.

 

Good point on deposit growth (far exceeding loan growth) causing NIM to drop. I think it is likely a major contributor. BAC earnings were actually pretty good, even taken out the gangbuster results from their investment banking operation.

[erdospi]

What was the deposit growth at WFC?  BAC and JPM make sense from that angle, didn't realize WFC was as large.

[CorpRaider]

Are you talking about the BAC hypothetical NIM where pretend that businesses don't exist (so they have a business mix closer to WFC's) or the real one? 

 

WFC's did go down 33 BPS. 

 

Did you see that .17% cost of deposits?  Free money.  Wells' deposits were up 2% linked quarter.  I think like 10% YoY.

 

I could see NIMs getting real thin. Who knows, would 1% or something be shocking?

 

I do think they are likely to be able to get a decent economic return over the cycle due to limits on competition/the fact that it is now a very very regulated, oligopoly.

 

[erdospi]

Are you talking about the BAC hypothetical NIM where pretend that businesses don't exist (so they have a business mix closer to WFC's) or the real one? 

 

WFC's did go down 33 BPS. 

 

Did you see that .17% cost of deposits?  Free money.

 

I could see NIMs getting real thin. Who knows, would 1% or something be shocking?

 

I do think they are likely to be able to get a decent economic return over the cycle due to limits on competition/the fact that it is now a very very regulated, oligopoly.

 

At 100bps how are they making a decent return? Customers paying increased fees?

[CorpRaider]

Yeah, that's the most likely avenue (to me). 

 

Does anyone have an idea what businesses WFC might be looking to sell/exit?  They said sub-scale businesses.  I wonder if that could that include the wirehouse/financial advisor business?  I have some fantasy where they align with the RIA model and maybe get the custody business more like what SCHW and Fido seem to be doing.  Maybe sort of like what USB did with State Farm...

[Parsad]

Curious what board members might think of this criticism: by bringing in outsiders to right the ship, Wells Fargo is committing a common turnaround mistake.  I believe it was the book "How the Mighty Fall" or "Good to Great" by Jim Collins (I can't recall) where it was found that the successful turnaround usually had brought people from within up to fix the company.  Perhaps the idea is that if the corporate culture is so weak that there is nobody from inside who can satisfy the position and right the ship, that the job is too momentous to have a high probability of success.

 

Thoughts?

 

 

 

 

As a banker who has successfully turned around a bank and lived through a failed one,  I strongly believe in banking that outsiders are needed to shift the dynamic in a struggling banking organization. Maybe it is anchoring in prior views or truly mismanagement, an outside view and structure can bring failing strategies to light, institute new ones, and investing in strong strategies. The independence of prior problems and troubles allows for more flexible and new approaches to work through the major rocks needed to improve the company.

 

We will see how this turnaround progresses. I have no position in WFC but think it is trading cheap, but I am not convinced yet that they have a firm grasp on the problem and have presented a viable plan to solve given the regulatory challenges faced.

 

 

As someone who has been working with people and companies with Tribal Leadership now for almost 8 years, I can tell you that most failing strategies are a function of a culture not aligned with the strategies. Most consultants just do change management without any actual transformation and ontological work involved which is where the culture shift happens. Without ever having been in the company, I'd be 99% it's a culture issue and if the culture shifted, new strategies would be created naturally as a byproduct of that.

 

...this is the last bastion of low-hanging fruit alpha IMO outside of super tiny net-nets which will always have an advantage due to limits of position sizing.

 

The truth is I could with maybe 3 other people come in and make more of an impact in Wells Fargo in 1 month than they have in the last few years.

 

The level of amateur hour is funny but also kind of sad. When I work with people, they assume I'm just another consultant and then their world gets rocked within 1-2 days.

 

Did you just use this post as a platform to market yourself?

 

Please let it go, Shane,

 

And please let Eric's post stand by it self [isolated, with "promotional intent "unintended""], because it contains a truth in itself, at least to me, personally.

 

Guy's keep posts related to topics.  No shots.  Cheers!

[ValueMaven]

Everyone loved WFC at 1.6x BV, and now no one wants it at 0.7x BV.  How ironic!!  What happened to the 'regional bank' on a large domestic scale with some of the strongest underwriting among the majors and no large trading or derivatives losses historically!! haha.  New mgmt is ripping the GUTS out of the company (in a good way IMHO) - once the asset cap is removed watch them go on the offense.  Very interesting that Teir 1 capital actually interested this quarter.  BTW - such a smart move to cut the divy as aggressively as they did. 

[villainx]

Everyone loved WFC at 1.6x BV, and now no one wants it at 0.7x BV.  How ironic!!  What happened to the 'regional bank' on a large domestic scale with some of the strongest underwriting among the majors and no large trading or derivatives losses historically!! haha.  New mgmt is ripping the GUTS out of the company (in a good way IMHO) - once the asset cap is removed watch them go on the offense.  Very interesting that Teir 1 capital actually interested this quarter.  BTW - such a smart move to cut the divy as aggressively as they did.

 

Interesting.  I had bought in to some of the below BV financials (AIG, CFG, C) and they had fully turned things around.  AIG was the worse, but it didn't have tradition of good management.  At least C and CFG are seeing performance improvements.

 

Anyway, I hope I'm not overreaching, but I guess I come about this more cautiously because I saw how things can't improve (or not nearly as quickly).  Whereas others who did the same thing with BAC might be more enthused because management turned things around better.   

[Guest cherzeca]

I have looked at this a couple of times.  cheap.  but every time I stop because it seems the bank is always doing something shady with customer accounts.  what a crappy firm culture. 

[LC]

Everyone loved WFC at 1.6x BV, and now no one wants it at 0.7x BV.  How ironic!!  What happened to the 'regional bank' on a large domestic scale with some of the strongest underwriting among the majors and no large trading or derivatives losses historically!! haha.  New mgmt is ripping the GUTS out of the company (in a good way IMHO) - once the asset cap is removed watch them go on the offense.  Very interesting that Teir 1 capital actually interested this quarter.  BTW - such a smart move to cut the divy as aggressively as they did.

 

Problem is we have market forces and external events (COVID, gov't spending response) pushing down NIMs.

 

And WFC is exposed - negligible trading business to counteract the heavy consumer/consumer-related lending. Mentally I think of them as the poor side of wealth-inequality, applied to the banking industry.

[ratiman]

They have $10B of expenses to cut. But if they take charges for writeoffs then that'll affect the earnings and the dividend. Plus the company is in pajamas mode right now and it's hard to turn around a bank with nobody in the office. In addition the WFC IT is duplicative and not up-to-date which means that expense reduction might require more investment to catch up with rivals. I'm no bank expert (if that wasn't already obvious) but what has WFC been doing for the last ten years? While JPM was chugging along and BAC and C were fixing all their problems it seems like WFC has a lot of catch-up to do that could take years. It's easy to look at the book value and say its undervalued but if C has proven anything it's that book value doesn't matter that much. I'd say this is generously priced at this level and anybody thinking that the expenses will be taken out in a couple years and WFC will be abnk to $3+ earnings is underestimating the size of the problem. It seems like a good franchise papered over poor operations for a number of years and now the bank will have to invest to improve performance at the same time as the franchise is getting hit from multiple directions. 

 

Some people seem to think the problems are priced in. Are they? When Kashkari says "raise capital" he means WFC. And once the  forebearance is over the banks will be targets again and a politician like Kashkari or Warren will want a scalp. Do you want to be holding WFC when that happens? 

[ValueMaven]

C is a totally different BIZ mix ... heavy in credit cards and EM countries ... which are much higher risk loan businesses; such a discount is warrented

[lnofeisone]

In addition the WFC IT is duplicative and not up-to-date which means that expense reduction might require more investment to catch up with rivals. I'm no bank expert (if that wasn't already obvious) but what has WFC been doing for the last ten years?

 

I think just catching up to rivals of 2020 would do WFC wonders. I think it's one of the lowest hanging fruit they have so would be interesting to see how Van Beurden/Mehta/ Kumar take it on. The good news is that banks don't really have the need to "innovate." Incremental updates are fine and all in the name of having reliable systems for consumers/employees that do all the right things to satisfy the regulators. From the  IT job postings WFC has out it looks like an organization mostly working in the maintenance mode of aging systems. I'd like to see how these postings change 6 months from now.

 

 

[redskin]

They have $10B of expenses to cut. But if they take charges for writeoffs then that'll affect the earnings and the dividend. Plus the company is in pajamas mode right now and it's hard to turn around a bank with nobody in the office. In addition the WFC IT is duplicative and not up-to-date which means that expense reduction might require more investment to catch up with rivals. I'm no bank expert (if that wasn't already obvious) but what has WFC been doing for the last ten years? While JPM was chugging along and BAC and C were fixing all their problems it seems like WFC has a lot of catch-up to do that could take years. It's easy to look at the book value and say its undervalued but if C has proven anything it's that book value doesn't matter that much. I'd say this is generously priced at this level and anybody thinking that the expenses will be taken out in a couple years and WFC will be abnk to $3+ earnings is underestimating the size of the problem. It seems like a good franchise papered over poor operations for a number of years and now the bank will have to invest to improve performance at the same time as the franchise is getting hit from multiple directions. 

 

Some people seem to think the problems are priced in. Are they? When Kashkari says "raise capital" he means WFC. And once the  forebearance is over the banks will be targets again and a politician like Kashkari or Warren will want a scalp. Do you want to be holding WFC when that happens?

 

$3/share of earnings seems like a pretty low bar for them to hit considering they have already increased the allowance for loan losses to nearly $19b.  With 4,100mm shares outstanding, $3 eps would only be $12.3b of net income.  They were consistently earning $20-22B over the past 5 years.  I understand the NII is under pressure, but they should still have something like $40B of NII going forward.  Sounds like they may have a few restructuring charges in the next 12 months, but the franchise still has tremendous value.

[changegonnacome]

Seems that there is somewhat consensus view emerging around the fact that the current monetary / fiscal solution to escape the current crisis is a maintained low/zero interest rate environment with a much looser approach heretofore seen around inflation.....i.e allowing inflation to ‘run hot’ for a number of years......in effect negative real rates.

 

My question is what does this environment look like for bank profitability......so low/close to zero nominal fed funds rate married to 1.5% inflation trending higher over next number of years to say 4%? Presume a bank would enjoy the 2-10 spread as 10yr bonds would begin to incorporate greater inflation expectations but short term deposits would remain low ?

[ratiman]

Seems that there is somewhat consensus view emerging around the fact that the current monetary / fiscal solution to escape the current crisis is a maintained low/zero interest rate environment with a much looser approach heretofore seen around inflation.....i.e allowing inflation to ‘run hot’ for a number of years......in effect negative real rates.

 

My question is what does this environment look like for bank profitability......so low/close to zero nominal fed funds rate married to 1.5% inflation trending higher over next number of years to say 4%? Presume a bank would enjoy the 2-10 spread as 10yr bonds would begin to incorporate greater inflation expectations but short term deposits would remain low ?

 

Fed has shown they will do whatever possible to keep long end of the curve low via "yield curve control" and depreciate the dollar. That's why gold is at all time highs. I would buy gold not banks under this scenario.