Wells Fargo (WFC) was founded in 1852 by the then President and Vice President of American Express, Wells and Fargo. It is one of the largest banks in the U.S. and is involved in lending and depository services, cash management, foreign exchange, trust and investment management services, investment banking, and insurance. It has doubled in size since it purchased Wachovia in 2008, and is now one of the largest four banks in the United States. The other three are Citigroup (C), JPMorgan Chase (JPM), and Bank of America (BAC).
Competitive Advantage
Wells Fargo has a strong capital position as it is already compliant with Basel III and has a good record of share repurchase. Furthermore, it has diversified revenue streams as fees are generated from a wide variety of sources and diverse varieties of customers as illustrated by the graphs below.
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Common Equity
Under Basel III, its Tier 1 common equity has to be at least 7% which Wells Fargo easily meets. However, many of its competitors don't have that level of Tier 1 common equity so this will help Wells Fargo's position comparatively as its competitors will have to adjust their operations to become compliant with Basel III. Wells Fargo's Tier 1 Equity is illustrated bellow in the graph.
Credit Rating (Click on graphics below to enlarge)
As illustrated above, its credit rating is also very healthy putting it in a healthy position to use borrowing to its advantage.
Historical Shareholder Return
Wells Fargo has traditionally enjoyed a very healthy relationship with its shareholders. This has been driven by solid shareholder returns over the years as well as conservative and healthy operating strategies which have allowed Wells Fargo to expand rapidly over the years.
Macroeconomic Trends
In the banking system, there are such very interesting developments happening which will affect the banking system over the coming years.
Basel III, the global regulatory standard on bank capital adequacy, stress testing, and market liquidity risk, was agreed on in 2011. It has strict capital requirements, and will force the U.S. banks to have a 7% common equity buffer. As noted above, Wells Fargo is already fully compliant with Basel III, which puts it in a better position then its competitors who as of yet are not compliant.
Also, interest rates are likely to affect American banks as the Federal Reserve keeps low interest rates through 2014. This means lower interest margins which has significant effects on banks like Wells Fargo.
BCG Matrix Analysis
Wells Fargo is a star in the growth-share matrix as it is well positioned to face the regulatory environment. So it has competitive advantage, and it has strength in diversification. Stars are companies with high market shares in a fast growing industry. Stars either become cash cows, illustrated by the cow, or slow growing companies, illustrated by the dog. In Wells Fargo's case, it will almost certainly become a cash cow as its Wachovia acquisition is now fully integrated in the company and the U.S. banking system is recovering rapidly, which will also help Wells Fargo's transformation into a cash cow.
Dividend Payments
Wells Fargo pays a 2.6% dividend annually, as of the latest figures. It is due to pay a dividend of $0.22 on May 2nd, hence the price rise Monday in the share price. Its annual dividend is about 1.5% higher than most other leading banks are offering currently. Bank of America currently offers a 0.5% dividend annually, Citigroup offers a 0.1% dividend annually, and JPMorgan offers a 2.8% dividend annually. Consequently, it offers a much larger dividend than 2 out of 3 of the other large U.S. banks, and is on level pegging with the other one, if slightly lower.
Valuation
This valuation values Wells Fargo at $43.09 per share and, at the time this article was written (May 1st), its share price was $34.26 per share up 2.53% for the day, making it a solid buy. Its expected growth rate and return on equity are expected to be well above average when compared to other banks, giving a strong incentive to buy shares.
Risks it faces
From a macro perspective, continuing low interest rates, a sluggish recovery, and consumer- and business-based spending affecting fee-based categories, could all hurt Wells Fargo.
In the industry specifically, Wells Fargo could be affected by higher regulation, strong competition from other recovering banks, and changes in loan and deposit pricing.
Qualified Opinions
Morningstar:
Fair Value Estimate: $41.00
Wall St. Recommendations: 24 analysts gave it a rating of 1.5 (1.0 is buy, 3.0 is hold, and 5.0 is sell)
4-star rating
CAPS rates it as a 4-star stock
Conclusion
In conclusion, Wells Fargo's fair value lies between $39.00 and $45.00 with a high level of certainty. Therefore, its current price of $34.26 per share would be a value investment as it is less than its intrinsic value currently. Furthermore, it offers a nice dividend compared to its closest competitor. Most importantly, it has competitive advantage in its field and is likely to grow noticeably faster than its competitors in the coming years.
All my data comes from morningstar.com and Javier Arguello.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
