Will All Be Well at Wells Fargo?

I am slowly turning from wanting to unload my Wells Fargo (WFC) position to just sitting back and keeping it.

Here is the Wells Fargo 2008 annual Report to shareholders:
Wells Fargo Annual Report

Tom Brown had some interesting thoughts on it. Here are just a few:

Management is honest. Candid admission of error in CEO letters is rare, yet right up front, Stumpf concedes, “We made some mistakes but kept our credit discipline.” Nor does Stumpf sugarcoat his outlook for the future. “If you’re a pessimist, there’s a lot for you to like about 2009,” he writes. “It will be a rough year for our economy and our industry. Consumer loans will continue under stress, chargeoffs [uncollectible debt] probably will continue to rise.” Contrast that with what you’ll read in letters from banks that lost money in 2008 (which Wells Fargo did not.) You’d never guess they’re buried under problem loans! Wells Fargo is not in denial.

The company wants to build value, not an empire. In 2008, Wells Fargo doubled its assets with the acquisition of Wachovia. But in discussing the deal, Stumpf emphasizes that Wells didn’t do it simply to bulk up. “Size alone means nothing to us,” he writes. Then Stumpf repeats a mantra coined more than a decade ago by his predecessor, Dick Kovacevich: “You don’t get better by getting bigger, you get bigger by getting better”. Somebody please tell that to AIG, Bank of America, and Citigroup!

Management is truly focused on its teammates. In most shareholder letters, CEOs feel the need to buck up the rank and file with some gratuitous comment that “our employees are our greatest asset” or “our people are our greatest competitive strength.” They don’t mean a word of it, of course. Wells Fargo does. The company has long believed it can differentiate itself with superior employee performance; the record of the last 20 years shows that it can—and has. Stumpf writes, “we call them team members (an asset in which to invest), not employees (an expense to be managed).” At Wells, that investment has paid off. According to survey data gathered by Gallup, Wells Fargo’s community banking group has 8.7 team members who say they’re engaged in their work for each team member that’s actively disengaged. This compares with 2.5 engaged-to-disengaged team members five years ago, and a national average of 1.5 to 1. I believe the deep commitment of Wells’s employees is a key factor in the company’s long-term success.

For my money, Wells Fargo's Chairman Richard Kovacevich had the best line about the current crisis when he said last year, "I'll never understand why bankers always seem to invent new ways to lose money when the old ones worked just fine".

Let's not forget Wells Fargo fought tooth and nail NOT to take TARP funds but was strong armed into it by then Treasury secretary Paulson. Now, there are those who may say, "give it back". I am sure Wells will repay it as soon as it can but, if the government is giving all its competitors (JP Morgan (JPM), Citi (C), Bank of America (BAC)) a financial boost, don't you risk losing some competitive advantage by declining it in an uncertain market? I believe you do.

This is especially true when you consider Paulson made it clear to Kovacevich that should he decline it then and need it later, it would be a most unpleasant transaction for shareholders. In the end, Wells took the money.

Time to sit back now and watch to see how the Wachovia (WB) merger is digested. There is too much uncertainty out there politically (both good and bad) to make a concrete decision.

Disclosure: Long WFC

Comments

[mikeliu:]

WELLS IS NOT THAT WELL!
Wells Fargo is not quite out of the woods, because it has one of the lowest tier one capital ratios, lowest tangible equity ratios and one of the largest problem loans. It's commerical real estate loan problem is just ticking to explode any time. Wells has relied on big interest spread to earn its way out of the problems, but its revenue is not as diversified as its major competitors. Given its current high stock price, it could become another B of A with any of the problemes mentioned above start to surface.

Mar 24 09:10 AM

[yukonmike1:]

What a difference 2 weeks make! What with the turnaround in WFC's stock price, up 100% and counting, it must be a good company and why wouldn't we take the CEO of a major bank at his word? Oh yeah, that's how we got into this mess in the first place.

This is one of the most irresponsible pieces of journalism I have read in a long time. Mr. Sullivan, you are the classic investor running with the herd. Stock goes up, it must be good! Stock goes down, I guess I should sell. Yes, this is America, and everyone is entitled to their own opinion, but it's truly too bad that others who are long WFC at this point might actually heed your advice and keep this POS in their portfolio. Good luck.

Mar 24 11:54 AM

[everyotherc...:]

"One of..most irresponsible pieces of journalism I have read in a long time". And don't forget the "POS" characterization.

Please hold the hyperbole and foul language. Why not try honest objectivity?

Mar 24 03:05 PM

[viewfromnyc:]

One of the biggest lies being propogated is that companies like Wells Fargo didn't need the TARP funds they received. If they had the ability to return the TARP funds, the Treasury would already have the check. A simple desire to throw off the yoke of government and taxpayer scrutiny does not magically make poor lending decisions and asset price declines disappear. At a minimum, Wells Fargo will struggle with losses in the Wachovia lending book. Wachovia was advertising negative amortization loans on television almost to the end. Take a look at the stock price of some other companies with large neg. am. exposure for a glimpse of WFC's future. FFED (formerly FED), DWNFQ (formerly DSL but the Q tells the whole story), BKUNA.

The other delusion is that the assets are good and it is just market to market accounting that forces banks to take a loss. It doesn't take many back of the envelope calculations to determine that even a prime conforming loan made in 2005 to 2007 is in trouble. At 90% LTV with the value down 25%, the loan is underwater almost 17%. While the loan is still servicable and all is fine until the prime borrower losses his or her job, then the 25% decline in value of the underlying collateral becomes 50% loss in foreclosure. Examine California sales data and a 25% decline is conservative. None of the pundits who spout this unsubstantiated assertion are willing to pay even 80 cents on the dollar for these assets (levels where banks would be happy to sell) or there would be no need for the Treasury's Public Private Investment Plan. Even if the assets were 90 cents on the dollar, the equity in a bank levered 8 to 1 would wiped out. Consider that too when analyzing bank holding companies with off balance sheet liabilities, e.g. GS and JPM.

Mar 24 06:06 PM

[Jake Blues:]

If WFC didn't need the TARP money, why didn't they cut the government a check and repay the funds the next day?

We have no clue what's on their balance sheet and how deep they're into CRE that is in the process of going bad.

Long term, WFC should be ok. Short term they are going to get massacred.

Mar 24 11:50 PM

[Fighting Yoda:]

All this talk of return the TARP is simply PR nonsense, typical banker arrogance. They need a new bailout everyday – TARP, TALF, PPF, indirect bailouts money via AIG, on and on.

All the banks are essentially in solvent – they have lent out mortgages that are way under water. With the economic situation, job losses etc – lot more write downs and losses to come.

Mar 24 11:59 PM

[ViewFromWithin:]

I know Wells Fargo culture very well. The company is probably in a better position to succeed than other banks in this market, but I just have to laugh at the insinuation that WF "team members" are much more engaged than other banks. Gallup poll says so? I can't speak for all of Wells Fargo because the way the retail ran things was direct result of how it's market president managed, but I can tell you that in WF's biggest market, all the retail employees are laughing at the Gallup result you present as a fact.

In retail, every little thing possible is measured and everything is shared with the branch managers including the Gallup poll results for the branch. Because the poll result was direct reflection of how branch is managed, district is managed, region is managed and so on... it wasn't uncommon for a branch manager to "help" answer the Gallup poll for their employees. In fact, it was encouraged to go over the poll questions with its team members to let them know that what Gallup is "really asking" is such. If you really want to know how engaged it's community banking team members are at WF, check out the turnover rate, which is just ridiculously high.

Wells Fargo overall is a good solid company with strong balance sheet and smart corporate managers up top. But in lower levels, especially in retail banking, because WF pays less then it's counterparts and because they have very low standard of hire (they turnover so much they can't find people fast enough), they lose all the good people and only the morons stay and "game" (which is basically cheating) their way to the middle management levels only to spread their faulty ways to their team members. Retail banking is a disaster. You don't believe me? Ask a former WF banker in a large metropolitan market.

Mar 25 12:07 AM

[greedcanbgood:]

The dirty little secret is that the government didn'tmake a clear provision should an institution wish to return the TARP funds early. In addition, and institution HAS to appyl for and be approved by the Treasury BEFORE the money can be returned. Why is this? Quite simply, if all the banks that were "healthy" returned the TARP funds because they could then it woul leave those that couldn't afford to do so. This creates a public preception that the bank is "failing" and could have wide reaching impact. Why do you think the FDIC doesn't publish the list of "watched" institutions?

Now the government is using it's "stress test" (by the way, they haven't told the banks what it takes to pass) as a means to limit who can and who can not pay back the money. Paying it back isn't as easy as it sounds - or should be.

Mar 25 10:26 AM

[bbowen7:]

WFC does have quite a track record - including the successful integration of Wells and Norwest. In the long run, I will bet on companies that are good operators in market segments where I can understand the business model, and how it adds value for customers. It is one of the few financial industry companies that I would own - and do.

Mar 25 01:54 PM