Same Old Wells Fargo

| About: Wells Fargo (WFC)

You’re going to see a torrent of notes from the sell-side in coming days about Wells Fargo’s (NYSE:WFC) analyst meeting, its first in 12 years, which took place in San Francisco on Thursday and Friday of last week. The company didn’t stint on providing a lot of details, so no doubt many of the notes will get down in the weeds. Here, though, are my big-picture takeaways.

1. Dick Kovacevich’s legacy lives! The company conveyed the same basic message it did 12 years ago, the last time it held one of these sessions, when Kovacevich was still CEO. A few details might be different, but the basic story’s still the same: the same strategy, the same philosophy of conservative accounting, and the same growth outlook. This consistency is one of the great legacies of Kovacevich’s leadership.

2. Investors still underestimate the importance of the Wells culture. Most of the best-run financial services companies I’ve seen have a distinct and positive culture. Wells certainly does. Too often, investors have a short-term focus and don’t own a company long enough to see the positive effect a strong culture can have. In any event, the winners who’ll keep on winning are the ones that spread their cultures as they expand their employee bases. That’s tough to do. But here, 12 years after Wells’s last big presentation (when the company was just one-sixth the size it is now, by the way), its culture is clearly still as strong as ever. Some key elements of the Wells culture are:

Teamwork. Wells Fargo does a great job of breaking down the business silos that inevitably develop inside any large organizations. At Wells, people in different business units work with one another as a matter of course. The CEO himself helps drive this behavior. So, too, does the company’s system of double accounting for incentives, which helps ensure everyone involved in a piece of business receives credit, regardless of where the business is booked.

Cross-sell. Dick Kovacevich’s main legacy is Wells’ devotion to trying to cross-sell as many products as it can to a given customer. The “cross-sell ratio” continues to rise.

Diversification. Wells Fargo is in over 80 businesses. Diversification was important to Dick Kovacevich because he believed, rightly, that it’s unwise to push every business to grow every year just for the sake of growth. That just forces a business at times to take on unacceptably high levels of risk, sometimes without even knowing it. Kovacevich stressed profitable, risk-adjusted growth. That remains a key part of the Wells culture under John Stumpf.

Cost-cutting, no; efficiency improvement, yes. Kovacevich stressed that a business that simply tries to cut costs isn’t apt to be successful long term, but a business that continually achieves efficiency gains likely will be. There’s a huge difference between simply slashing costs and generating improved efficiency.

Realism. The mindset at Wells Fargo is one of optimism mixed with realism. This hard-headed confidence is conveyed to investors.

Conservative accounting. Dick Kovacevich’s first CFO was John Thornton, who developed the company’s culture of conservative accounting. This tradition has continued under the current CFO, Howard Atkins. The most recent significant recent example of the company’s approach is evident in the valuation Wells put on the assets it acquired via the Wachovia deal. Data the company provided last week leave no doubt that, as a result of those conservative valuations (particularly of Wachovia’s Pick-a-Pay residential mortgage portfolio), the company will end up with gains as a result of the deal.

Go slow with large mergers. Even though Wall Street persistently pushes acquirers to integrate deals (and thus generate cost “savings”) as fast as they can, Wells makes a habit of going slowly and deliberately, to minimize customer disruption and random dumb mistakes. In addition, the company always moves its acquirees to its own IT system, rather than cobbling two separate systems together. In the short term, that’s more costly and time-consuming. But over the long-term, it’s much more efficient and provides much more flexibility.

Culture is important for a company’s long term success. Wells Fargo’s culture is distinct, and was on display last week for all investors to see.

3. The Wachovia acquisition is shaping up to be a home run. From a strictly financial perspective, the deal is a winner. It will generate a high return on investment and, given the conservative valuation of the acquired assets, will likely boost future earnings. But the deal is also a home run strategically, as well. It should enhance the company’s future growth by allowing it to move into new markets, add talented managers, and strengthen certain product areas--most notably wealth management and brokerage.

4. Wells Fargo has a terrific management team. Give both Dick Kovacevich and John Stumpf credit for assembling an extremely able group of executives out of a string of acquisitions over several cycles.

While it’s not easy to judge the strength of a management team from just a single presentation, I’ve known most of Well’s management for years. Last week was just a confirmation and reminder of how talented this group is. Here are three examples from three legacy companies:

First is Mark Oman, who runs Wells’ residential mortgage business. When Oman was named head of the mortgage unit (then Norwest Mortgage) in 1989, the company had less than 1% market share in originations and no servicing portfolio. Now Wells’ origination share is an industry-leading 23.5% and Wells is the second-largest servicer, with a 16.7% share. More importantly, the mortgage unit’s ROE has averaged 23% since 1989 and, despite the volatility of interest rates and the challenges of hedging, still generated an ROE of 8% even in its very worst year. The mortgage unit’s ROE has fallen below 15% in just three years out of the past 20.

Given these results, I believe Oman is the best mortgage banking executive in the industry, and has been for the last 20 years.

The second key executive is Dave Hoyt, who runs wholesale banking. Hoyt comes from the legacy Wells Fargo, which was an outstanding corporate and real estate bank. I wasn’t sure Hoyt would stay with Wells Fargo after the merger with Norwest in 1998. Thank goodness he did because under his leadership, the company has avoided significant commercial real estate loan problems, despite its large exposure in the area. This was no accident. The company really is that good!

Hoyt has a great team, and he himself is the best in the business among wholesale bankers.

Finally, there’s David Carroll, who runs wealth management and brokerage. Carroll joined Wells through the Wachovia merger; he was the only member of Wachovia’s senior management Wells kept. Carroll has basically done it all in his 30-year career. That’s important, because wealth management and brokerage will be one of Wells’ most important growth opportunities in coming years. This will be an instance where the company’s habit of silo-busting could really pay off. To get the most out of Wells brokerage opportunity, Carroll will have to work closely with Dave Hoyt and Carrie Tolstedt (who runs community banking). I suspect Carroll’s unit, which now provides 11% of the company’s earnings, will account for a higher and higher percentage over time.

Mark Oman, Dave Hoyt, and David Carroll are three examples of the remarkable executives Kovacevich and Stumpf plucked from legacy institutions in order to build a first-class team.

Great position. Wells Fargo has an uncommonly strong management team, a diversified group of businesses, and particular growth opportunities arising from the Wachovia merger. I believe no large banking company has a better growth outlook than Wells Fargo, yet its stock trades at just 11 times next years consensus estimate, and just 8 times our estimates of “normalized” earnings.

If you missed the investor day last week, check out the slides on the company’s website. You won’t get a feel for the great management team but you will for the company’s record and its growth opportunities.