WFC - Wells Fargo

[Junto]

Wabuffo, I wasn't responding on your point on the reserves. Just helping out the other poster on the loan / deposits question. I agree PPP loan program doesn't have an impact on reserves or Fed Balances in simpler terms. Certainly not as you look on a banking system basis. 

 

What a lot of banks have been doing is buying mortgage backed securities with their excess reserves at the Fed or trying to stoke or garner more loan demand. The money does flow through the banking system. The Fed is increasing that money supply by being a large player. That is the macro part that I am referring to. That doesn't mean that WFC needs to keep excess reserves. It could easily be BAC or JPM or another bank who doesn't want to reinvest back out into the economy or cannot find demand at which point deflation becomes a larger concern. I was on the deflationary camp this spring but I am moving towards the inflationary camp this fall as the Fed and government's actions became more clear.

 

My point is that individual banks have more control over the money on their balance sheet than what you are indicating.  Think of the balances at the Fed as a bank's operating account. It is their checkbook for business activities. If I want, I can buy securities, make loans, buy loans, or take other actions with those deposit dollars as I see fit as manager of the account. The Fed does not require me to keep any excess in there. Now from a practical perspective, you will always keep excess operating funds in a checking account to maintain liquidity, cover unforeseen changes in the market, and for other liquidity reasons but you are not required to. If I have an asset cap, I am more likely to cycle out low earnings assets for higher earning assets or move into non-asset intensive businesses like ETFs (Wells Fargo is launching these).

 

I think we are confusing a general monetary policy argument with a single bank's balance sheet composition constraints.  wabuffo's makes the good point that as the Federal Reserve's balance sheet grows, so too does the total amount of bank reserves on deposit at the Federal Reserve across the entire banking system. There are a few papers published by various federal reserve board constituents on this topic.

 

This is where we are differing on opinion. Eatliveinvestgolf was stating this as well.  It's just a different approach to the issue and how one thinks around the banking industry. As a practitioner, I think in how I know I can manage and flex my balance sheet. I know what I can control and what I can't and extrapolate that to WFC.

 

As an investor, you are thinking about the macro limitations and impacts to the banking system.  Your view is that the Fed will continue to drive liquidity into the banking system that will more or less cripple WFC by increasing their percentage of on balance sheet cash with a fixed asset limit.  It is a very nationalistic view of the banking system. 

 

My view is that management has more flex over that balance sheet composition than you give it credit for.  Simple as that. My further bet is outline in my earlier post and why I am long WFC. 

[Spekulatius]

Banks as an investment are way more macro dependent than most other business. It is almost impossible to do well with bank stocks, if the macro environment is unfavorable for banks.

[Mephistopheles]

I am long WFC:

- Catalyst of a new CEO with a new management team that I believe can refocus the organization on prudent growth and profitability, diversity in revenue streams, and materially improve the cost infrastructure of the organization

- Trading at $24.79 compared to tangible book at $31.88 and book at $38.67 and 2022 earnings of $3.52

- The banks I manage ($1 billion in assets so small in comparison) are not seeing widespread defaults and stress in the portfolio to levels where realized losses can be expected at the levels the large banks are reserving. The other community banks I talk to our also not seeing materially increased level of defaults.

- I see some secular growth in housing due to demographic shifts (Millennials are driving new household formation), interest rates, and housing inventory levels being the lowest since 2003 and on the lower bound of history going back to the 1960s (months of housing supply https://fred.stlouisfed.org/series/MSACSR)

- Wells Fargo was #3 in mortgage volume in 2019 and given its relatively low asset needs to originate and sell mortgages, I am sure they are leaning into this market growth. Add to it the forbearance mortgage buyback program that Bloomberg has already mentioned is driving earnings at WFC by the billions (https://ca.finance.yahoo.com/news/banks-uncover-loophole-buy-home-100000066.html

- regulatory catalyst of coming off issues related to prior management that if relaxed under new management will be an immediate pop to the stock price

- COVID vaccine may result in a material jump in job creation across the board but particularly in the hospitality sector (restaurants specifically) that I think is being discounted on its ability to bounce back.

 

I may be wrong on how it plays out but this is a value forum and I think this is straight up a value investment. Strong potential upside with a limited downside and a dividend around 1.63%.  If it is dead money for a little while, I am still earning above savings account rates but if it does move forward the way I anticipate into 2022 earnings, it could be a double in three years. 

 

 

 

I agree with you on pretty much all of this. Buffett's sell decision is really perplexing to me. We know he does not view the interest rate risks as a negative given he's been buying BAC. Of course the situation with WFC is not pretty but that's why it's at a multi year low. He got into BAC when it was going through some ugly problems as well. Moynihan did a good job of trimming a lot of the fat which is what Scharf is set out to do.

 

The asset cap really needs to be lifted. It's so mind boggling to me that the Fed is desperately trying to flood the country with money, and here we have the third largest bank with its gates locked up with the money trapped behind it. And all for what? To teach them a lesson? They've lost 3 CEOs, have had major clawbacks, fines, all of that. I think they've learned their lesson. Why not let them do some basic banking to help achieve the goal that the Fed wants achieved for the economy? For these reasons I think it is bound to happen any day now, and it will indeed be a wonderful catalyst.

 

But surely Buffett sees this too. Why let go of the entire position and pay taxes on gains earned over 30 years? It's concerning.

 

I'm looking forward to the next DJCO 13-F and hoping Munger hasn't sold a single share.

[Cardboard]

Who cares about Buffett?

 

He is pushing more into BAC while dumping the cheaper name and speculating a massive anount of shareholder wealth into a one gadget $2.1 trillion company.

 

WFC is super simple. It is an out of favour, too big to fail money-center bank, with sticky retail accounts, with franchises on streets all across America, earning a decent return on capital likely to grow over time and trading at a very attractive valuation on relative and absolute basis.

 

News is really similar to BAC in 2010-2011 but, you don't have good bank/bad bank, you don't have a massive, scary derivatives book, and you don't have Lehman Brothers' sister or Merrill Lynch at the time.

 

So discount is less than BAC was but, turnaround should also be much faster from this low level.

 

You guys know the story about stupid Elizabeth Warren and these fake accounts but, how many common mortals do and have stopped being customer for this reason?

 

And macro, well, if the shit hits the fan it will be bad for all stocks. Might as well be in cheaper ones and companies having already gone through purgatory and faced stiff regulations for over a decade.

 

Cardboard

[thepupil]

Why let go of the entire position and pay taxes on gains earned over 30 years? It's concerning.

 

many shares are were bought at higher prices. It's not clear to me this will result in significant taxes unless he sells ALL shares. He may even be realizing tax benefits.

[LearningMachine]

With WFC, I'm actually less worried about the asset cap (yes, it restricts growth, but WFC can still earn 15% annually on equity with $1.95T capped assets), but I'm more worried about their CRE and C&I loan portfolio, especially with the office building vacancy going up as much as 20-30%, resulting in office building prices to drop as much as 50% over next year or so.

 

Wells Fargo is so far reserving for real estate prices to fall only about 10-15%.  See https://www.americanbanker.com/news/a-grim-outlook-for-wells-fargos-commercial-loan-book.  10-15% loss in CRE values shouldn't result in that much loss for WFC because of borrower equity taking first hit from those losses.  But, when values start dropping beyond the equity cushion, it will be devastating as (1) losses will impact banks directly 100% instead of being absorbed by borrower's equity cushion first, and (2) resulting foreclosures can further degrade values.

 

In 2019 Annual Report, WFC had total $512.59 Billion commercial loans, out of which $122B is in non-government-guaranteed CRE mortgage, $20B is for CRE Construction, $284B in Commercial & Industrial loans in U.S., and $67B is in Commercial & Industrial loans outside U.S.  If CRE prices drop a lot, it will be devastating for WFC and other banks with CRE loans. See https://www08.wellsfargomedia.com/assets/pdf/about/investor-relations/annual-reports/2019-annual-report.pdf

 

[Cigarbutt]

Why let go of the entire position and pay taxes on gains earned over 30 years? It's concerning.

many shares are were bought at higher prices. It's not clear to me this will result in significant taxes unless he sells ALL shares. He may even be realizing tax benefits.

FWIW, some of this is from unaudited notes, including estimates. The evolving thesis and melting position are interesting.

 

                      #shares(M)        %ownership          unrealized gain(B)        share price

2016 yr-end      500.0                  10.0                        14.8                          ~56

2017 yr-end      482.5                    9.9                        17.4                          ~66

2018 yr-end      449.3                    9.8                        10.1                          ~49

2019 yr-end      345.7                    8.4                        11.6                         53.80

 

To go from 8.4% to 3.3% ownership means minus 5.1% ownership change. Decomposing that 5.1% (3.1%+2.0%), i estimate (assuming LIFO type of tax lot accounting) that the first 3.1% sold was about breakeven and the last 2.0% sold resulted in about 500-600M in realized gains, leaving about 1B in residual unrealized gains (at today's prices). Ouch!

I doubt that taxes are a primary consideration. Interestingly, from end of 2016 to end of 2019, Wells Fargo reduced shares outstanding by 13.4% and from end of 2016 to end Q2 2020 by 19.6%.

[gfp]

Interestingly, from end of 2016 to end of 2019, Wells Fargo reduced shares outstanding by 13.4% and from end of 2016 to end Q2 2020 by 19.6%.

 

Are you sure that 13.4% figure is correct?  I believe the 19.6% figure but 13.4 sounds low and implies a huge repurchase right before the pandemic halted share repurchases.  Seems like the 13.4% figure should be more like 18% range.

[Cigarbutt]

Interestingly, from end of 2016 to end of 2019, Wells Fargo reduced shares outstanding by 13.4% and from end of 2016 to end Q2 2020 by 19.6%.

Are you sure that 13.4% figure is correct?  I believe the 19.6% figure but 13.4 sounds low and implies a huge repurchase right before the pandemic halted share repurchases.  Seems like the 13.4% figure should be more like 18% range.

i was sloppy and lazy and i think you're right.

By not going to the ultimate and proximate source, i looked at a graph that likely suffered from lags and imprecisions and that graph, even if imprecise, perhaps is an accurate reminder that, at least for me, the best time to do a deep dive in Wells Fargo is after the company reaches maximum buyback activity:

https://www.macrotrends.net/stocks/charts/WFC/wells-fargo/shares-outstanding

Along classic and conventional measures, the company reports much better capital and liquidity measures than in 2007; the big unknown now is the capital and liquidity that will be required going forward.

[Rasputin]

With WFC, I'm actually less worried about the asset cap (yes, it restricts growth, but WFC can still earn 15% annually on equity with $1.95T capped assets), but I'm more worried about their CRE and C&I loan portfolio, especially with the office building vacancy going up as much as 20-30%, resulting in office building prices to drop as much as 50% over next year or so.

 

Wells Fargo is so far reserving for real estate prices to fall only about 10-15%.  See https://www.americanbanker.com/news/a-grim-outlook-for-wells-fargos-commercial-loan-book.  10-15% loss in CRE values shouldn't result in that much loss for WFC because of borrower equity taking first hit from those losses.  But, when values start dropping beyond the equity cushion, it will be devastating as (1) losses will impact banks directly 100% instead of being absorbed by borrower's equity cushion first, and (2) resulting foreclosures can further degrade values.

 

In 2019 Annual Report, WFC had total $512.59 Billion commercial loans, out of which $122B is in non-government-guaranteed CRE mortgage, $20B is for CRE Construction, $284B in Commercial & Industrial loans in U.S., and $67B is in Commercial & Industrial loans outside U.S.  If CRE prices drop a lot, it will be devastating for WFC and other banks with CRE loans. See https://www08.wellsfargomedia.com/assets/pdf/about/investor-relations/annual-reports/2019-annual-report.pdf

 

I would look at the latest stress test results, the scenario included 35% decline in CRE prices.  Among the trillionaires, WFC's loan portfolio did 2nd best, with BAC being the best, but the difference is negligible.  Big gap to #3 which is JPM.  There is one entity outside WFC that knows the detail of their loan portfolio, loan by loan, and that is the fed stress test team. 

[DooDiligence]

In the bleakest of scenarios Wells still holds up nearly as good as BOA, and JPM doesn't look so good. Of course, this is assuming that the worst isn't optimistic. In my weak assed opinion, there are too many potential catalysts that could lead to an upward rerating of Wells & banking in general. Granted, unforeseen & extended existing negative macro events can cut deeper to the downside. Put on your big boy pants or go home  ???

 

www.federalreserve.gov/publications/files/2020-dfast-results-20200625.pdf

 

www.federalreserve.gov/supervisionreg/dfa-stress-tests.htm

Wells_Stress_Test.pdf

[LearningMachine]

I would look at the latest stress test results, the scenario included 35% decline in CRE prices.  Among the trillionaires, WFC's loan portfolio did 2nd best, with BAC being the best, but the difference is negligible.  Big gap to #3 which is JPM.  There is one entity outside WFC that knows the detail of their loan portfolio, loan by loan, and that is the fed stress test team.

 

Indeed, I've been studying the DFAST results since they came out.  It was clarified in the earnings calls for WFC, BAC, JPM, USB or PNC that the Fed actually doesn't know the loan portfolio, loan by loan, and goes by only the overall numbers the bank provides them.  It was also further clarified in one of the calls that Fed's calculation is based on statistics and not based on quality of each loan.

 

If you look at the percentage of loan portfolio that WFC has in CRE, it is a lot higher than BAC.  DFAST results didn't mention anything about impact of remote work.  Looks like they based their CRE prices on past recessions. 

 

Also, DFAST results were based on unemployment assumptions going to a highest of 10.0 percent in 2021 Q3 for their severely adverse scenario.  We already hit 14.7% in April 2020, while DFAST assumed unemployment of 6.1% for Q2 2020.  It was wierd that the DFAST results were released after 14.7% from bls.gov had already been published, but DFAST still had lower unemployment numbers.  Maybe the DFAST results were already calculated by the time BLS numbers came out, and Fed didn't want to go back and correct their assumptions and recalculate in time for publishing.

[Rasputin]

I would look at the latest stress test results, the scenario included 35% decline in CRE prices.  Among the trillionaires, WFC's loan portfolio did 2nd best, with BAC being the best, but the difference is negligible.  Big gap to #3 which is JPM.  There is one entity outside WFC that knows the detail of their loan portfolio, loan by loan, and that is the fed stress test team.

 

Indeed, I've been studying the DFAST results since they came out.  It was clarified in the earnings calls for WFC, BAC, JPM, USB or PNC that the Fed actually doesn't know the loan portfolio, loan by loan, and goes by only the overall numbers the bank provides them.  It was also further clarified in one of the calls that Fed's calculation is based on statistics and not based on quality of each loan.

 

If you look at the percentage of loan portfolio that WFC has in CRE, it is a lot higher than BAC.  DFAST results didn't mention anything about impact of remote work.  Looks like they based their CRE prices on past recessions. 

 

Also, DFAST results were based on unemployment assumptions going to a highest of 10.0 percent in 2021 Q3 for their severely adverse scenario.  We already hit 14.7% in April 2020, while DFAST assumed unemployment of 6.1% for Q2 2020.  It was wierd that the DFAST results were released after 14.7% from bls.gov had already been published, but DFAST still had lower unemployment numbers.  Maybe the DFAST results were already calculated by the time BLS numbers came out, and Fed didn't want to go back and correct their assumptions and recalculate in time for publishing.

 

https://www.federalreserve.gov/publications/2020-march-dodd-frank-act-supervisory-stress-test-methodology-modeled-loss-rates.htm

 

"Commercial Real Estate Loan Model

Modeled Loss Rates on Pools of CRE Loans

The output of the CRE loan model is the expected loss on each loan"

 

From the Q2 2020 transcript

 

John Pancari

 

On the credit side, just want to see if I can get your updated thoughts around your through

cycle loss estimates that you would expect I know your 2020 company run DFAST is

about $27.7 billion. Is that a fair way to think about it, and then also want to get your

thoughts around the reserve, you took a pretty good addition this quarter and now your

reserve is about 74% of that 2020 DFAST. Do you think there's a likelihood for additional

substantial reserve additions from here? Thanks.

 

John Shrewsberry

 

Thanks, thanks for the question. So we're, we do the math to compare our own

estimations to the DFAST outcomes, but we don't think of them as necessarily better

informed about our loans and our portfolios and our risk profile and our collection activity,

et cetera. So it's a useful data point. It's an external one that people can judge against, but

we think more about our own experience and the scenarios that we believe are the likely

ones in the world that we live in. And so that's how we focused it.

 

Brian Kleinhanzl

 

Okay. And then separately when you think about the DFAST results, you may perform

better than those results, I guess, where do you take exception with kind of how the Fed is

modeling your stress losses versus how you see them coming through this cycle?

 

John Shrewsberry

Yes, forgive me if I don't, if I don't start response by saying we take exception with the

Fed’s results in the following way, because that's not really that will be helpful. But they

draw from different models and have different approaches. And we draw from our own, as

I said bottoms up, our own modeled outcomes or historical outcomes, changing the

composition of the portfolio, changing the underwriting standards, since whatever we're

comparing it to and we end up with the numbers that we end up with, I'm happy to note

that I think in general, the Fed applies in general a lower loss rate for a variety of loan

categories to Wells Fargo than they have for some other lenders, it's not universally true

based on the composition of portfolios.

But where we like our numbers a lot of work with a lot of very close inside knowledge of

borrowers properties, et cetera goes into it and it's being compared to something that's

more statistically driven from a model that we don't have access to.

 

To me, it just means the models are different.  And don't forget DFAST do not assume any government intervention.  Current market cap is already below the minimum CET1 during the 9 quarter severely adverse scenario. 

 

 

[John Hjorth]

Thank you, Rasputin,

 

Great point [something to really think about], & nice to see you back here on CoBF!

[Mephistopheles]

Within CRE, Office RE is 26% of the portfolio. But is it office really that risky? People are working from home, but that doesn't mean tenants can't afford their mortgage payments.

 

The big problems are retail, shopping center and hotels, which total $40 billion or about 29% of the portfolio but account for 60% of nonaccruals. Office at 26% is only 13% of nonaccruals.

 

I think the bull market in residential if anything will provide a cushion against CRE losses. In either case, they have a $20 billion allowance cushion which is a solid amount.

 

I am more worried about what they have no control over - interest rates. What happens if we get negative rates in the U.S.? The Fed should really read wabuffo's posts.

[LearningMachine]

John Shrewsberry

Yes, forgive me if I don't, if I don't start response by saying we take exception with the

Fed’s results in the following way, because that's not really that will be helpful. But they

draw from different models and have different approaches. And we draw from our own, as

I said bottoms up, our own modeled outcomes or historical outcomes, changing the

composition of the portfolio, changing the underwriting standards, since whatever we're

comparing it to and we end up with the numbers that we end up with, I'm happy to note

that I think in general, the Fed applies in general a lower loss rate for a variety of loan

categories to Wells Fargo than they have for some other lenders, it's not universally true

based on the composition of portfolios.

 

 

Thanks Rasputin.  Interesting, we were listening to the same call, and walked away with different interpretations.  I latched on to the bold, i.e. Fed looking at loan categories, and unlike the Fed, WFC doing bottoms up approach.

 

Also, when looking at Fed's DFAST methodology, I latched onto words like "each loan group".

 

https://www.federalreserve.gov/publications/2020-march-dodd-frank-act-supervisory-stress-test-methodology-modeled-loss-rates.htm

 

Certain groups of loans generally have wider ranges of losses than other groups. Although the loans are grouped according to the most important characteristics in the model, other loan characteristics in the model also affect loss rates, albeit in a more limited manner. Differences in these other characteristics within each loan group are responsible for the range of loss rates shown in the tables.

[LearningMachine]

I am more worried about what they have no control over - interest rates.

 

I am not worried about this because I think Fed and the politicians of both parties will eventually be successful in creating inflation, and long-term market interest rates will follow inflation.

[Foreign Tuffett]

I am more worried about what they have no control over - interest rates.

 

I am not worried about this because I think Fed and the politicians of both parties will eventually be successful in creating inflation, and long-term market interest rates will follow inflation.

 

But how much confidence do you have in your ability to predict future interest rate movements?

[LearningMachine]

I am more worried about what they have no control over - interest rates.

 

I am not worried about this because I think Fed and the politicians of both parties will eventually be successful in creating inflation, and long-term market interest rates will follow inflation.

 

But how much confidence do you have in your ability to predict future interest rate movements?

 

Not much, but I don't need to have that confidence to get a good return.  My priority is to survive without any dilution with 100% certainty first, and that is impacted most by loan losses.  Regarding how much profitability we get will depend on interest rates. 

 

To generate 15% return, need only 0.78% ROA.  If interest rates stay low, we continue living with 10-15% return on equity.  If interest rates shoot up, we get much much higher returns.  So, interest rates going up is icing on the cake :-).

[CorpRaider]

Rates and everything else will inflate, but rents and CRE values (broadly...like, across the WFC book) won't?  All that stuff is too hard for me (or anyone whom I've known...or read about).  If you can forecast all/any of that stuff, get a futures account and I humbly beseech you to invite me to visit you on "macro island." 

 

No doubt the Fed zoomed out a level, for their somewaht ridiculous hypothetical exercise (where they assume away trillions of $$$ that were already issued...apparently destroying WFC's balance sheet because of inability to issue a shitton of loans into financial stasis....) but I think they certainly had access to the data.  Let's be honest, they can call Scharf on the toilet if they want....and he will answer. 

 

It's a somewhat unique situation where an outside party has waaaaay more access to data some of which they publish than any investment analyst could ever dream of.  You guys are really sharp to focus so much on that.  Buffett and Graham always really focused on that kind of stuff, didn't they? 

 

When I observed how similar the results were between BAC and WFC I probably overly discounted the output because I thought "you can tell it's like a hypothetical "normalized" statistical exercise."  But it's probably good they didn't go in too much (more?) false precision. 

[Viking]

I am more worried about what they have no control over - interest rates.

 

I am not worried about this because I think Fed and the politicians of both parties will eventually be successful in creating inflation, and long-term market interest rates will follow inflation.

 

LearningMachine, what gives you confidence that the Fed will be able to create inflation?

 

Has Japan not been failing miserably at this exact same thing for 20 years? Has Europe not failed for the past 6 years? It seems to me fairly clear that developed economies for the past 30 years have been in a slow decent to zero interest rates. And all now look firmly on a glide path to negative rates. We are in the worst recession since the Great Depression. Do people honestly think in this environment the Fed will be able to reverse the current trend?

 

Mild deflation is the most likely outcome in the coming years. Covid will likely be with us for years; if so, economic output will continue to lag and unemployment will remain elevated. This sounds to me like deflation is much more likely than inflation. The Fed can do all that it wants to prop up asset prices. Perhaps this slows the current trend; but inflation followed by higher interest rates? No way... way too much debt for rates to move higher. And the economy will be too weak to support higher rates.

 

Yes, there is a chance the Fed will be successful with their current experiment. But the odds for this happening are low.

[thepupil]

Within CRE, Office RE is 26% of the portfolio. But is it office really that risky? People are working from home, but that doesn't mean tenants can't afford their mortgage payments.

 

The big problems are retail, shopping center and hotels, which total $40 billion or about 29% of the portfolio but account for 60% of nonaccruals. Office at 26% is only 13% of nonaccruals.

 

I think the bull market in residential if anything will provide a cushion against CRE losses. In either case, they have a $20 billion allowance cushion which is a solid amount.

 

I am more worried about what they have no control over - interest rates. What happens if we get negative rates in the U.S.? The Fed should really read wabuffo's posts.

 

i have nothing to opine on the future of NIMs, rates, inflation, etc.

 

I'll just say that the office DQ rate right now is about 1.5%. as you note, most tenants are paying their leases, ergo most owners are paying their mortgages.

 

to the extent that there will be widespread distress in office, it will come later, whereas the distress in hospitality (25%+ DQ, owners losing / giving up their assets left and right) and retail is very much here RIGHT NOW.

 

lastly, there's only one company to which i send $2K of interest per month. if that's not reason to own WFC, I don't know what is!

 

 

[Cigarbutt]

In the bleakest of scenarios Wells still holds up nearly as good as BOA, and JPM doesn't look so good. Of course, this is assuming that the worst isn't optimistic. In my weak assed opinion, there are too many potential catalysts that could lead to an upward rerating of Wells & banking in general. Granted, unforeseen & extended existing negative macro events can cut deeper to the downside. Put on your big boy pants or go home  ???

www.federalreserve.gov/publications/files/2020-dfast-results-20200625.pdf

www.federalreserve.gov/supervisionreg/dfa-stress-tests.htm

This is a line of reasoning that makes sense but, even if the long-term risk-reward profile has improved with present market valuation, i've decided, for now, to wait (not hope, just be ready, just in case) for more absurd prices. i'll be ready to switch this idea from the unrealized errors of omission pile to the realized one, if applicable.

WFC and other large banks are much better capitalized and show a better liquidity profile. So i've been looking at various stress tests. The problem with these regulatory tools, to a more or less significant degree, is that they are always 'improved' in order to fight the last war.

WFC has several strong attributes and the present management travails offers a potential entry point. But there's the possibility (not unlike Geico in the mid 70s) that inadequate credit pricing risk plays out in an environment where the ultimate liquidity provider may not be able to restore confidence, at least for a while, and even if considered too large to fail.

The banks may be able to muddle through somehow (as in the case almost always) but there are deflationary risks to the widespread debt overhang. The liquidity providers have not crossed the Rubicon for the inflation risk but they are knee-deep. The fact that Japan has reached waist level is not reassuring. It may come to be a Faustian bargain.

Banks are in the business of money and looking at money fundamentals is fair game. Recently, i came across the following which were helpful to think about some issues discussed in various preceding posts.

https://www.bankofengland.co.uk/-/media/boe/files/ccbs/resources/understanding-the-central-bank-balance-sheet.pdf

https://image.mail1.wf.com/lib/fe8d13727664027a7c/m/4/43376de0-7960-4db7-8a90-25013d288732.pdf?utm_source=SFMC&utm_medium=email&utm_campaign=&utm_content=&utm_term=7230679&sid=1954577

https://www08.wellsfargomedia.com/assets/pdf/commercial/insights/economics/special-reports/implications-20200803.pdf

This topic and this investment are bound to remain interesting, at least intermittently.

[Cardboard]

18 months or so ago I wrote down on a piece of paper on my desk:

 

BAC annualized or regular earnings of $2.90

 

WFC annualized or regular earnings of $4.80

 

BAC tangible book of $18.50

 

WFC tangible book of $33

 

Since then a new form of flu (like we see every 100 years) has appeared and continued bad press for Wells and stock has been cut in more than half.

 

It is now selling for less than 5 times (really average to mediocre) earnings or a very big discount to the group. Why?

 

After all, these big banks are now regulated utilities and are not allowed to swing for the fences. Some discount/premium could occur between them if one has higher ROA or growth but, here 5 times normal times earnings? Seems like extreme isn't?

 

Cardboard

 

 

[Cigarbutt]

^In 1989-90, Mr. Buffett paid 290M for a 10% ownership in WFC, paying less than 5x earnings (corporate taxes were higher then but so were interest rates).

This was a typical and run-of-the-mill cyclical recession scenario in correlation to loan decisions done during the boom phase.

It may be correct to suspect that in 5 to 10 years, it will be realized that now is such an opportunity.

Similar arguments could be raised about this virus episode, especially since it is an external 'shock'. But it may be the (economic) host that is weaker and more at risk.