WFC - Wells Fargo

[LearningMachine]

The only issue is that IMO now is great time in the cycle to be making significant retail and corporate loans.

 

If you were making loans from your own unleveraged capital, maybe the risk/reward of making retail and corporate loans at this moment could work out for you.  With banks, you have to remember that all it takes is a small percentage of loans to go bad for their CET1 capital to go under what they need to hold and for FDIC to take over the bank, wiping out the shareholders.  To avoid such a severe scenario for your shareholders, you have to handle this with utmost responsibility when you are a bank.  I think probabilities of such a severe scenario are lower outside retail and corporate loans currently.  Also, there will be a better time to make loans when interest rates move higher across the board, even for higher quality loans, instead of having to reach for lower quality loans currently. 

[WayWardCloud]

Can you think of any scenario under which the asset cap is being lifted during a Democratic presidency?

 

The progressive wing of the party has made punishing big banks a core symbol of their beliefs and, even though Biden and Harris are more pragmatic and may decide it's in the customer's interest to re-open the flow of lending, I can't think of a way they could ever lift the cap without being assailed by Sanders/Warren/AOC who command a big chunk of the younger part of the electorate and I doubt they want to lose precious approval points on that particular issue.

 

Are we potentially looking at 4, maybe 8 more years under a cap? How could Wells PR spins a lift so that a Biden administration saves face? Can Wells still do OK from this level in the even of a cap "forever"?

 

Ps: I have tried my best to stick to the facts and use a neutral tone. I know how fast anything that touches politics can derail here. I humbly request that you try as well.

[Mephistopheles]

Does the average person even know about the asset cap? Or know what it even means? Idk if lifting the cap will draw much attention from the public.

 

Here's my question. The fed wants inflation and credit availability. Shouldn't they lift the cap to create more lending in order to do so? Isn't that one of the obvious ways to help the country in a recession to not tie the hands of the 3rd largest bank?

[Junto]

Does the average person even know about the asset cap? Or know what it even means? Idk if lifting the cap will draw much attention from the public.

 

Here's my question. The fed wants inflation and credit availability. Shouldn't they lift the cap to create more lending in order to do so? Isn't that one of the obvious ways to help the country in a recession to not tie the hands of the 3rd largest bank?

 

Short answer is yes but that is not how the Fed thinks. There’s a lot of potential catalysts in this stock at its discount to tangible book and reserve levels. 10 yr has been moving up and 2-10 spreads are widening to levels last seen in 2018.

 

As a banker I like competing against WFC but as an investor this is too cheap to pass up. $30 by spring $40+ in late 2021-early 2022

[fareastwarriors]

U.S. bank profits down 70% from year prior on coronavirus uncertainty

 

https://www.reuters.com/article/us-usa-fdic-results/u-s-bank-profits-down-70-from-year-prior-on-coronavirus-uncertainty-idUSKBN25L1YM

[LC]

Can you think of any scenario under which the asset cap is being lifted during a Democratic presidency?

 

The progressive wing of the party has made punishing big banks a core symbol of their beliefs and, even though Biden and Harris are more pragmatic and may decide it's in the customer's interest to re-open the flow of lending, I can't think of a way they could ever lift the cap without being assailed by Sanders/Warren/AOC who command a big chunk of the younger part of the electorate and I doubt they want to lose precious approval points on that particular issue.

 

Are we potentially looking at 4, maybe 8 more years under a cap? How could Wells PR spins a lift so that a Biden administration saves face? Can Wells still do OK from this level in the even of a cap "forever"?

 

Ps: I have tried my best to stick to the facts and use a neutral tone. I know how fast anything that touches politics can derail here. I humbly request that you try as well.

 

They need to position it as good for the poor, lowly consumer. Cheaper mortgages, expanded community lending, that kind of stuff.

 

The playbook is, you get regulators to concede that WFC is in-line with the other large banks. This takes work, of course.

 

Then, you position it that your asset cap is limiting your ability to expand lending to "those who need it most". Find the current politician's most vulnerable part of their voter base, and say "well I wish I could offer great priced loans to the poor urban voters / poor rural voters, but because of your asset cap, I am limited!"

 

 

[fareastwarriors]

Can you think of any scenario under which the asset cap is being lifted during a Democratic presidency?

 

The progressive wing of the party has made punishing big banks a core symbol of their beliefs and, even though Biden and Harris are more pragmatic and may decide it's in the customer's interest to re-open the flow of lending, I can't think of a way they could ever lift the cap without being assailed by Sanders/Warren/AOC who command a big chunk of the younger part of the electorate and I doubt they want to lose precious approval points on that particular issue.

 

Are we potentially looking at 4, maybe 8 more years under a cap? How could Wells PR spins a lift so that a Biden administration saves face? Can Wells still do OK from this level in the even of a cap "forever"?

 

Ps: I have tried my best to stick to the facts and use a neutral tone. I know how fast anything that touches politics can derail here. I humbly request that you try as well.

 

They need to position it as good for the poor, lowly consumer. Cheaper mortgages, expanded community lending, that kind of stuff.

 

The playbook is, you get regulators to concede that WFC is in-line with the other large banks. This takes work, of course.

 

Then, you position it that your asset cap is limiting your ability to expand lending to "those who need it most". Find the current politician's most vulnerable part of their voter base, and say "well I wish I could offer great priced loans to the poor urban voters / poor rural voters, but because of your asset cap, I am limited!"

 

Isn't the Asset Cap imposed by the Federal Reserve, a supposedly independent body?

 

 

[LC]

supposedly independent

 

;D

[wabuffo]

Then, you position it that your asset cap is limiting your ability to expand lending to "those who need it most"

 

Under current Fed policy of expanding its balance sheet, its actually shrinking the balance sheet of Wells - because the portion of Wells balance sheet that is frozen in an account at the Fed (ie. bank reserves) is increasing.  It went from 6% of total assets at the end of Q1 to 12% at the end of Q2.  Since total assets are capped - the "working part of Wells b/s has to shrink from 94% to 88%. 

 

If the Fed continues to expand reserves, its going to kill Wells.  Its pretty ridiculous.

 

wabuffo

[LearningMachine]

Let's take the worst case scenario that the asset cap is not lifted for another 8 years.

 

With $101 Billion market cap today, you're buying the right to invest almost $1.4 trillion of deposits, and get the proceeds from those investments minus losses and opex costs. As long as WFC's existing CRE, oil, commercial and other loans don't blow up, and they invest the money in treasuries, government guaranteed securities, and other high quality loans, and stay away from low quality loans going forward, keep the Opex costs low, they can just pass that money directly to shareholders in terms of dividends or buybacks instead of growing the assets.

[WayWardCloud]

So many thoughtful answers, thanks guys, lots to think about!

LC, you are hired, can you start yesterday?  ;D

[Castanza]

Can you think of any scenario under which the asset cap is being lifted during a Democratic presidency?

 

The progressive wing of the party has made punishing big banks a core symbol of their beliefs and, even though Biden and Harris are more pragmatic and may decide it's in the customer's interest to re-open the flow of lending, I can't think of a way they could ever lift the cap without being assailed by Sanders/Warren/AOC who command a big chunk of the younger part of the electorate and I doubt they want to lose precious approval points on that particular issue.

 

Are we potentially looking at 4, maybe 8 more years under a cap? How could Wells PR spins a lift so that a Biden administration saves face? Can Wells still do OK from this level in the even of a cap "forever"?

 

Ps: I have tried my best to stick to the facts and use a neutral tone. I know how fast anything that touches politics can derail here. I humbly request that you try as well.

 

They need to position it as good for the poor, lowly consumer. Cheaper mortgages, expanded community lending, that kind of stuff.

 

The playbook is, you get regulators to concede that WFC is in-line with the other large banks. This takes work, of course.

 

Then, you position it that your asset cap is limiting your ability to expand lending to "those who need it most". Find the current politician's most vulnerable part of their voter base, and say "well I wish I could offer great priced loans to the poor urban voters / poor rural voters, but because of your asset cap, I am limited!"

 

Wouldn’t it be likely that Wells would receive a cap lift on a contingent basis? And if they took this approach wouldn’t that be incentive to write poor loans?

[Junto]

Then, you position it that your asset cap is limiting your ability to expand lending to "those who need it most"

 

Under current Fed policy of expanding its balance sheet, its actually shrinking the balance sheet of Wells - because the portion of Wells balance sheet that is frozen in an account at the Fed (ie. bank reserves) is increasing.  It went from 6% of total assets at the end of Q1 to 12% at the end of Q2.  Since total assets are capped - the "working part of Wells b/s has to shrink from 94% to 88%. 

 

If the Fed continues to expand reserves, its going to kill Wells.  Its pretty ridiculous.

 

wabuffo

 

Fed reserve requirement is currently zero https://www.federalreserve.gov/monetarypolicy/reservereq.htm

 

I think deposit growth is and balance sheet positioning for flexibility is driving the change. I know we are sitting on much more liquidity than we would like right now to provide the greatest flexibility while loan demand is lower and interest rates are through the floor in the bond market.

 

My outlook is for long term rates to continue flowing higher while short term rates staying lower for longer.

[fareastwarriors]

a little beep

 

https://www.reuters.com/article/us-wells-fargo-finra/u-s-regulator-sanctions-wells-fargo-over-variable-annuity-switches-idUSKBN25T2BP

 

U.S. regulator sanctions Wells Fargo over variable annuity switches

[Ballinvarosig Investors]

Looks like Berkshire are going to sell out completely.

 

https://finance.yahoo.com/news/berkshire-hathaway-slashes-stake-troubled-212431667.html

 

When you look at the sale of Wells and other financials in the Berkshire portfolio, it really looks like Buffett has a negative view of the sector as a whole. The last time I remember him being so bearish on a sector was energy, and he call that brilliantly.

[Mephistopheles]

Looks like Berkshire are going to sell out completely.

 

https://finance.yahoo.com/news/berkshire-hathaway-slashes-stake-troubled-212431667.html

 

When you look at the sale of Wells and other financials in the Berkshire portfolio, it really looks like Buffett has a negative view of the sector as a whole. The last time I remember him being so bearish on a sector was energy, and he call that brilliantly.

 

Doesn't square up to him ramping up BAC. Thoughts on that?

[wabuffo]

Fed reserve requirement is currently zero

 

That's for required reserves and that measure has been irrelevant for decades - but most especially in the last ten years of excess reserves.  Overall reserve levels in the banking system are driven 100% by Fed decisions to expand its balance sheet.  The big banks can't do much about it.  That's why there are $2.85T of reserves at the Fed today.

 

In Wells' case, their bank reserves went from $108 billion at the end of Q1, 2020 to $217 billion at the end of Q2.  When one has an asset cap of $1.95T, that really squeezes the bank. 

 

wabuffo

 

 

[Cigarbutt]

Looks like Berkshire are going to sell out completely.

https://finance.yahoo.com/news/berkshire-hathaway-slashes-stake-troubled-212431667.html

When you look at the sale of Wells and other financials in the Berkshire portfolio, it really looks like Buffett has a negative view of the sector as a whole. The last time I remember him being so bearish on a sector was energy, and he call that brilliantly.

Doesn't square up to him ramping up BAC. Thoughts on that?

i would say these are significant moves and reflect both absolute and relative motives.

-In 1990, the WFC's love story was announced (stake (one sixth) built in 1989 and the rest (to reach 10% ownership) in 1990) when the stock decreased by 34% (note BAC went down by 45% in 1990). The rationale: Banks are risky but WFC was well run, was available cheap based on traditional value measures and could weather most likely downside scenarios. For the next twenty years, WFC did great and materially outperformed both the S&P 500 and BAC. Note: during that 20-year period, BAC followed more or less the index although it seemed to do better for a while during the post dot-com-driven home loan bubble.

-In 2007, BRK significantly increased stakes in many large banks in a "buy American" way with the underlying assumption that leveraged institutions would be covered by entities that would do the right thing.

-In 2020, WFC and bank exposures are going down ++ with residual stakes in the relatively stronger survivors?

i wonder if the feeling that Mr. Buffett is late here may not be an assumption that should be questioned?

 

[Junto]

Fed reserve requirement is currently zero

 

That's for required reserves and that measure has been irrelevant for decades - but most especially in the last ten years of excess reserves.  Overall reserve levels in the banking system are driven 100% by Fed decisions to expand its balance sheet.  The big banks can't do much about it.  That's why there are $2.85T of reserves at the Fed today.

 

In Wells' case, their bank reserves went from $108 billion at the end of Q1, 2020 to $217 billion at the end of Q2.  When one has an asset cap of $1.95T, that really squeezes the bank. 

 

wabuffo

 

I don’t disagree that balances are increasing at the Fed but that is not what you said. Okay to change the narrative but the money is not frozen. They are just accumulating liquidity as other banks are but it will press margins when growth is limited.

 

The mortgage market strength is a big plus for WFC  and will allow them to make some positive moves to improve earnings and their focus will turn to momentum forward. Expense reductions are definitely there when comparing to other large banks, brand still has a core following, and new CEO has the background and the incentive to move it forward.

 

At today’s discount to tangible book, there’s opportunity for us investors who believe that Mainstreet has been supported better than what the talking heads on CNBC are indicating. Furthermore, that the economy will rebound more strongly after vaccine and governments allow more normalized activities.  We are seeing it already in the unemployment numbers even while under pressure.

 

We are not seeing defaults increasing and are building loan losses but at some point, it becomes excessive and we cycle back the other way. We need California and New York to come back online for the recovery to gain steam. Vaccine progress is imperative for those two states in particular.

[wabuffo]

that is not what you said.

 

Junto - in both of my posts I made exactly the same two points.

 

1) bank reserves are frozen.  What I mean is that deposits at the Fed are a "special" currency that only circulates in a closed-loop between the Fed, the federally-chartered US commercial banks and the US Treasury.  They can't go anywhere else as these are really settlement balances used to clear US payments.  The amount of settlement balances circulating at any one time is decided by the Fed. 

 

2) the amount of bank reserves in aggregate that the US commercial banking sector are carrying on their balance sheets is 100% a function of the Federal Reserve and its actions (also the US Treasury - but let's leave them out of it for now).  When the Fed is buying assets, it is increasing bank reserves for the US banking system.  While an individual bank can try to change its reserve balance, the total amount can't change unless the Fed changes it by selling assets from its balance sheet.

 

My central point is that Wells didn't double its settlement balances held at the Fed between Q1 and Q2 by choice.  It (and all other banks) were forced to by the Fed increasing its balance sheet during that quarter.  I think where you and I disagree is that you seem to think that the banks are increasing their reserves by choice - and I am saying that they are not driving that bus - the Fed is.  This is a problem for all US banks - but it is a particularly acute problem for WFC because of their hard asset cap which forces them to liquidate other parts of their asset structure to accomodate the increase in settlement balances at the Fed.

 

Its a simple point and it is always consistent.

 

wabuffo

[Rasputin]

i don't know much about macro and how the fed + us treasury action is driving TOTAL bank cash reserves,

 

but specifically for WFC, this $109 billion increase in cash reserves between march 31 2020 and june 30 2020 is roughly equal to $75 billion decline in period end loans (partially driven by wfc's own actions) and $34 billion increase in period end deposit between march 31 2020 and june 30 2020. 

[Mephistopheles]

Fed reserve requirement is currently zero

 

That's for required reserves and that measure has been irrelevant for decades - but most especially in the last ten years of excess reserves.  Overall reserve levels in the banking system are driven 100% by Fed decisions to expand its balance sheet.  The big banks can't do much about it.  That's why there are $2.85T of reserves at the Fed today.

 

In Wells' case, their bank reserves went from $108 billion at the end of Q1, 2020 to $217 billion at the end of Q2.  When one has an asset cap of $1.95T, that really squeezes the bank. 

 

wabuffo

 

Why cant WFC take the amount that is excess from this and lend or buy treasuries? I understand why total bank reserves are a result of the fed but you seem to be saying any individual bank has no choice but to keep these excess reserves at the Fed.

[wabuffo]

you seem to be saying any individual bank has no choice but to keep these excess reserves at the Fed.

Yes - they are settlement balances.  You and I don't get accounts at the Fed, neither does Apple or Berkshire Hathaway.  They are special accounts that the banks use to clear payments with one another as well as with the Fed and the US Treasury.  Every private sector payment between two different banks (or between a bank and the US Treasury or Fed) gets cleared at the Fed.  Banks must maintain positive settlement balances at all times in order to clear their daily payments without overdrawing their Fed clearing accounts. 

 

The total amount of bank reserves is a policy variable that is set and managed by the Federal Reserve based on the desired size of balance sheet it wants to maintain.

 

Why cant WFC take the amount that is excess from this and lend

WFC lending doesn't affect their reserve account (at first) and simultaneously creates both a new asset and a new deposit for WFC.  This would push them over their hard asset cap - no can do without affecting its total reserve balance.  The fact is that banks don't need reserves in theory to lend.  They lend first, which creates a deposit.  If the deposit moves, then they use reserves to clear it with the receiving bank.

 

or buy treasuries?

If WFC spent its entire $217 billion to buy Treasuries, then during payment clearing, some other bank would receive $217 billion in WFC's reserves.  The other big banks also don't want any additional reserve balances.  For example, JPMorgan holds $306 billion of reserves - do you think they want another $200 billion when JPM's total assets are a bit over $2T?  Reserves are also the preferred asset by bank regulators when it comes to the big banks meeting their "living will" regulations - even over super-safe Treasuries.

 

In the end, this push me-pull you ends up in a steady-state where the big banks hold their share of total reserves roughly in-line with their overall share of deposits and payment flows.

 

When a greater portion of banks' total assets are conscripted into settlement accounts by the Fed, its a problem that most banks try to deal with by trying to grow assets.  But its a very big problem for WFC due to their asset cap.  The cap was put in during a time when the Fed was shrinking its balance sheet - but that has changed dramatically since March.  If anything, the Fed has indicated it has a desire to keep growing its balance sheet for the foreseeable future.  If the asset cap isn't removed and the Fed keeps growing its balance sheet (and bank reserves), it slowly asphyxiates WFC.  I've never seen anything like it, short of putting an insolvent bank out of business.  The Fed is slowly putting WFC out of business.

 

wabuffo

[Junto]

Fed reserve requirement is currently zero

 

That's for required reserves and that measure has been irrelevant for decades - but most especially in the last ten years of excess reserves.  Overall reserve levels in the banking system are driven 100% by Fed decisions to expand its balance sheet.  The big banks can't do much about it.  That's why there are $2.85T of reserves at the Fed today.

 

In Wells' case, their bank reserves went from $108 billion at the end of Q1, 2020 to $217 billion at the end of Q2.  When one has an asset cap of $1.95T, that really squeezes the bank. 

 

wabuffo

 

Why cant WFC take the amount that is excess from this and lend or buy treasuries? I understand why total bank reserves are a result of the fed but you seem to be saying any individual bank has no choice but to keep these excess reserves at the Fed.

 

Banks can draw down their Fed balances to increase loans. There is no requirement to keep reserves at the Fed. Wabuffalo continues to miss this point or is not articulating it well. There is excess liquidity in the system right now which is driving up balances as banks consider the duration of the liquidity before deploying it into assets like loans or securities.

[wabuffo]

Banks can draw down their Fed balances to increase loans.  Wabuffalo continues to miss this point or is not articulating it well

 

First of all - its wabuffo, not wabuffalo.

 

But I'd like to understand your point, Junto, because you seem very adamant about it.  How exactly does a bank "draw down a fed balance" to make a loan?  If I'm missing something, I'm always eager to learn more.

 

wabuffo