Wells Fargo (WFC) did the investment community a great service in May by hosting an investor conference for its shareholders. This investor presentation covered all aspects of Wells Fargo's business, covering hundreds of pages of texts and graphs. Today I am going to focus on the core, consumer operations of Wells Fargo.
The Consumer Lending Group was formed in August, 2011, and includes Wells Fargo's home mortgage and equity loans, the credit card unit, the automobile loan unit, and the student loan unit. Wells Fargo has over 6,000 retail branches, and the Consumer Lending Group has over 22 million household clients and $355 billion in loans outstanding at the end of the first quarter of 2012. At year-end 2011, 29% of its income came from mortgage loans, and the same amount from auto loans. Credit card income made up an additional 26%, and various other loans, such as education, comprised the remaining 16%.
Wells Fargo is the country's number one originator of mortgage loans. It held a market share of 27% of all domestic mortgage originations in 2011, and held a servicing portfolio of $1.8 trillion. On the home equity side, Wells Fargo is also the nation's leader, having written 2 million household loans involving $6 billion in originations. Its overall equity line portfolio is about $103 billion and in 2011 while it was writing those equity loans, main competitors Bank of America (BAC) and JPMorgan Chase (JPM) were writing $4.4 billion and $1.1 billion in such loans, respectively.
In general, Wells Fargo has been bucking the trend of its larger banking cousins, and aggressively courting new loans. During the first quarter of 2012, it issued 76% more credit card accounts than in the same quarter of 2011. It also issued 92% more personal loans, and 38% more auto loans than in the year ago quarter. In times where banks, including Wells Fargo, are struggling to maintain interest rate margins, loan growth really helps to grow overall interest revenue. In summary, Wells Fargo is this country's number one mortgage originator and servicer; number one used care lender, and a close number two in private educational loans. That demonstrates an obvious commitment to consumer banking, a market that Citigroup (C) sees fit to abandon in favor of what it believes are greener shores overseas. The year over year growth across the consumer loan portfolio should continue through the rest of the year.
Supporting the growth in loans in the consumer credit unit is the fact that by most any parameter, credit conditions are improving for Wells Fargo, and elsewhere. Overall Wells Fargo mortgages, whether first mortgages, second mortgages, or equity loans, had a delinquency rate of 7.07% in the fourth quarter of 2009 compared to 4.51% in the first quarter of 2012. With that, the bank cites more evidence of an improving economic climate, such as first quarter light vehicle sales up 13.4% over the first quarter of 2011, and home furniture sales up 12.5%. Pent up demand will continue to drive retail and commercial sales, I believe, until the underlying economy catches up.
Now that Wells Fargo has completed the integration of its mega purchase of Wachovia in 2008, it has relationship information on 70 million individuals. In addition to more than doubling the size of Wells Fargo, the purchase gave Wells Fargo, for the first time, a substantial East Coast presence. It has over 9,000, just over 6,200 are the traditional retail branches, which it calls "stores," with the balance being wholesale offices, and advisor offices. All told, Wells Fargo now has a presence in every state in the country. The ethos instilled into its 56,000 store employees is the idea of "cross selling." This staple of the retail industry, and note how Wells Fargo has "stores" instead of "branches" requires substantial commitments to training, and there is no assurance that all 56,000 employees are up to snuff. As of March of this year, a Wells Fargo credit card was in 30% of American homes, and either a mortgage or equity mortgage loan on 24% of homes. But many other categories, such as educational private loans, and direct new car loans, Wells Fargo has less than 5% of American customers. It is into those types of situations that Wells Fargo can cross sell, and add to its revenue growth.
One cross selling emphasis really caught my eye. That is, Wells Fargo offers all mortgagees a "home rebate card," which offers a 1% rebate toward the principal of their mortgage. It has met with wild approval among eligible customers, to no one's surprise.
Like the rest of the bank, the Consumer Lending Group is aiming to cut costs, and it has a target of non-interest expense declining by 8% in 2012 versus 2011. Wells Fargo overall is working toward aligning its various units so that customer credit information, identity information, and related issues can be shared across the entire bank.
Finally, the real reason underlying Wells Fargo's success: It has no history of chasing unprofitable business. A twenty year look at first mortgage market share shows steady growth, except in the periods of 1999 to 2000, and 2004 to 2007. What those years represented where frothy credit environments, aka "bubbles," leading to recessionary periods. The bank's overall mortgage market share had risen to nearly 14% in 2003, and then hovered at around 10% from 2004 through 2007, before skyrocketing, aided by acquisitions, to its current total of nearly 27%.
Other than its size, Wells Fargo has little in common with the three other domestic banks with over $1 trillion in assets, JPMorgan, Bank of America and Citigroup. Perhaps the most noticeable of the differences is Wells Fargo's focus on individuals and households, and not on credit swaps and hedge funds. In the first quarter of 2012, Wells Fargo earned a return on assets of 1.31%, second highest of any of the 20 largest banks in the country after U.S. Bank (USB). Wells Fargo's cost cutting programs, along with attention to revenue growth, all but guarantee continuing earnings increases that are above average for the sector. It carries now an above average yield of 2.9%, and carries a below average 5 year PEG of 0.82. The stock has lost 10% of its value since early April, so now is a great time to invest.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.