Wells Fargo: A Growth Stock During the Great Depression?

With all the talk lately of a sharp economic contraction, Wells Fargo (WFC) investors and depositors might find it entertaining to know how their bank, with its famously strong balance sheet (uniquely AAA rated), prospered during the great depression of the 1930s.  

Specifically, according to "Stagecoach," a history of the bank published by Simon & Schuster in 2002:  "From 1929 to 1936, Wells Fargo increased the number of its deposit accounts from about sixty thousand to nearly eighty-five thousand and doubled its deposit base from from $125.6 million to $250.7 million. Customers, especially business customers, were voting their money with their feet and moving to solid ground."

Turning back to the present day, it is clear that WFC will have heavy loan charge-offs in the quarters ahead. However, if you look at their last quarter, their net interest margin was up nicely (4.92% versus 4.89% in the prior year and 4.69% in the prior quarter). This trend of an increasing net interest margin will only be furthered along by the current flight to safety among depositors and the willingness of borrowers to pay up for any credit at all.

Disclosure: Long position in WFC.

Comments

[User 265729:]

Quick! I can't wait until Monday to pour my money into WFC! LOL

2008 Sep 28 03:28 PM

[TraderGreg:]

They will have to show the defaults for Q3. They did very good job hiding it, but the game is over. Let's see the numbers first. So far, I feel like they are cheating the investors.

2008 Sep 28 03:37 PM

[The Realist:]

You are absolutely correct, now is the time to buy a bank trading above where it traded in Oct 07 at the market top and is now trading at a 16 P/E and who has lied about its loan losses by changing the definition of default from 120 days to 180 days.

2008 Sep 28 03:46 PM

[sickofthehype:]

Right on with the comments. Great institution no doubt, but a buy right now. No way. Maybe at $20 it was decent, but don't forget about those write-downs and CA HELOC issues still out there.

2008 Sep 28 03:59 PM

[IDNeon:]

This is an unrelated circumstance, during the Depression people were moving to California for cheap work on recently opened agricultural land, opened by government programs such as the Hoover Dam which provided water to the Imperial Valley.

If you look at the number of accounts opened versus the value of deposits, you can clearly see that the people creating new accounts during the depression were in some way wealthier than those already holding accounts, suggesting WFC was expanding into a void in a relatively new market. Today it's grown rather sizeable in its old market venue and has to compete in all other markets. What WFC has going for it now is not what was going for it 70 years ago. Still strong though.

2008 Sep 28 04:06 PM

[frcf:]

I have a feeling Buffett would have a very different view than some of the negative posts above, as he has been loading up on WFC shares both in 2007 and 2008. This is a very strong bank which will not only survive but gain considerable market share. They collect low cost deposits and lend them at what are now much higher rates. Their return on equity is going to shoot up. Along with a few other strong survivors, they are going to have the whole market to themselves! This indeed is a growth stock even in tough economic conditions.

Remember, Buffett is never wrong on his big bets.

2008 Sep 28 05:04 PM

[Obama is Bu...:]

shur1l: Remember, Buffett is never wrong on his big bets.

Buffett himself would beg to differ with you. He sunk a lot of money into USAir Group -- which was a huge losing trade until some "bright" state pension managers from Georgia decided to buy USAir and bail Buffett out.

Buffett was a big investor in Fannie Mae -- but after holding the position for several years he bailed out and called Fannie a disaster waiting to happen.

Lets not forget one of his biggest purchases was General Re, which came with billions in undocumented derivatives trades that eventually led Buffett to call derivatives weapons of financial destruction.

Too many of Buffetts disciples only remember his winning trades-- like everyone else, Buffett has had some failures too.

As for Wells Fargo -- the company is extraordinarily concentrated in California, which is having one of the most severe real estate collapses in the country.

Some people like to claim WFC is more conservative in lending, but there isn't much evidence behind this folklore. It might be true, but the only "evidence" anyone ever gives is that "everyone knows Wells Fargo is more conservative"... If they were really more conservative, we should have seen a terrible plummet in the amount of loans they were writing near the peak of the real estate bubble -- but instead we saw a continuation of the trend. Doesn't sound like they were turning away people.

I happen to have several colleagues who received **unsolicited** home equity loans from Wells Fargo through the US Mail. They never requested the loans, so obviously they didnt fill out any liar loan type documentation -- or any documentation. All they had to do was endorse the back of the check and deposit it in their checking account and the loan was activated!!!!

I know this is very anecdotal evidence, but it really made me reconsider the "accepted wisdom" that Wells Fargo is more conservative in their lending.

2008 Sep 28 05:31 PM

[RobM:]

Wells Fargo is very conservative. Wells Fargo refused to get into the Option ARM Mortgages. The very same mortgages that is killing Wachovia.

2008 Sep 28 05:44 PM

[frcf:]

Buffett mistakes have been small. WFC is a huge "bet" - I am sure he himself would rather refer to it as as a sure thing. Wells is now his 2nd largest holding:

www.dataroma.com/m/hol...

The chances are that with more additions and rising stock price, wfc may in fact surpass KO and become his largest holding. He actually spent more money buying WFC shares in 2007 than JNJ, and that's inspite of the fact that he already held a large chunk of wfc. This is buffetts proverbial fat-pitch, and of course other investors are completely oblivious to it. But that is what makes him great. He sees things before everyone else does. He saw the credit crunch comming, he saw the disaster waiting to happen with derivatives and the very likely real estate bust. And yet, he kept adding to his wfc position. He knew that wfc's earnings were not peak earnings - that if anything, the credit boom had intensified competition, thereby making life harder for conservative and well managed banks like wfc. Ironically, the credit crunch has now given wfc an opportunity to increase market share and benefit from rising margins while other banks are selling assets to shore up capital.

Buffett is a genius.

2008 Sep 28 05:56 PM

[jljamup:]

They always get the gold through come Rain,Sleet, Snow,Hell or High Water,Mc cain or Obama .Buy Buy Buy . don,t let pisssimism stop you.

2008 Sep 28 06:06 PM

[Obama is Bu...:]

shur1l: Showing that WFC is one of Buffett's largest holdings proves nothing other than it is one of his largest holdings... it doesn't prove anything else

If WFC goes up and/or KO goes down -- that still doesnt provide any evidence about whether WFC was a conservative lender.

Buffett saw the disaster in derivatives coming precisely because they caused him so much pain in his General Re purchase -- he got burned, it wasn't foresight at all.

General Re was his largest single purchase -- WFC and KO are only his largest holdings in publicly listed companies, they are much smaller in size than GenRe

Avoiding option ARMs (assuming they really did avoid them) is important -- but it doesn't tell us anything about their underwriting of other mortgage types. If they lent money on overpriced California real estate, they can still have massive losses. Its hard to imagine how they could have avoided that mess entirely.

And to RobM: constantly repeating that WFC is very conservative does not make it so... it just makes you sound like a parrot. I readily admit my only experience with WFC is very anecdotal and not a good basis from which to draw an opinion... I would love to see some actual numbers about WFC's loan underwriting, rather than mindless religious chanting.

I have had several dozen Wall Street "analysts" try to sell me credit products related to WFC and they CONSTANTLY repeat over and over that WFC is super conservative -- but not one of them has been able to show me any numbers.

That doesn't prove anything about WFC -- but it does tell me the crowds are dangerously mindless. Following the mindless crowds is a great way to lose a lot of money

2008 Sep 28 06:56 PM

[fatcat:]

WFC or ,any other bank,is a long way from profitability....have at it...

2008 Sep 28 07:20 PM

[pablosplace13:]

The strength of a bank is about deposit dollars and loan quality. Their loan quality was/is definitely better than others but they will have their share of problems. However, the sheer size of the infusion of new deposit dollars, especially over the past 2 weeks, is astonishing. What a different story it is from other banks...

2008 Sep 28 07:29 PM

[User 265729:]

jljamup, RIGHT! Don't let pessimism stop you! Don't let the economy stop you! Don't let the fact that you may lose your home tomorrow stop you! Don't let the fact that you may lose your job tomorrow stop you! Don't let the fact that most economist in academia (without vested interest in the "system") think the bail-out will fall flat on its face and leave us with BOTH a failed economy AND an incredible debt! Don't let Paulson's own words on 60 Minutes stop you:

Paulson said the U.S. economy is in a ``a very fragile situation'' even with enactment of the bailout. ``We will have turbulence and turmoil in our financial system for some time,''

Don't let the fact you have no money stop you! Don't let the fact that every country in the world thinks that we are idiots and that they are currently in the process of limiting exposure with our economy bother you!

BUY! BUY! BUY!

How on Earth do you think we got into this mess in the first place?

2008 Sep 28 08:39 PM

[short WFC:]

i got my short in the day before the no shorts law around 34. the reason is that i did not see anyway for banks to do better in this recessionary and poor credit environment. although the quick bail out package may cause a jump in wfc, its balance sheet has a 190B debt its not swimming in cash to go purchasing competitors , and these are less likely to drop dead with free gov money available. as is the case with socialism, the strong (WFC) get less help then the weak

2008 Sep 28 09:49 PM

[Ellen:]

I heard that Wells Fargo is now arbitrarily calling in their outstanding Home Equity Loans and demanding immediate repayment in full. I also heard that B of A is canceling their credit cards for anyone with under a 750 credit rating.

2008 Sep 28 10:40 PM

[DaveBlz:]

Odd...There seems to be arguing about WFC, while USB looks to be the choice in this industry. I can't seem to decide who is right about Wells Fargo from the posts, but some of the contributors might want to take a break and consider an alternative. Quality, quality, quality. Figure out who has it in an industry and start there...

2008 Sep 28 11:25 PM

[rb1253:]

"Realist" states an issue with WFC is that they changed the default timeline on loans -- if he/she looked at the numbers -- the loans this impacted --which was an attempt to work with customers --is far less than the EXCESS reserves WF added in the 2nd quarter. Look at the accounting on banks -- they write off loans and have to add to reserves in bad years in effect taking a double hit-- they are not allowed to add to reserves above a certain amount in good years --this is what causes the up and down in earnings during cycles -- problems like today's could be significantly reduced if this one accounting rule were changed. --conservative banks like Wells --who make decisions based on the long-term health of the compnay and not the quarterly expectations of analysts would add extra reserves during good years if they were allowed. When we get through this cycle --and we will get through it --you will see what happens with Wells -- their revenue continues to grow at double digit rates even today. Their assets have grown during this period at record pace -- how? They are buying quality loans from institutions that need capital or need to shrink their loan portfolios for capital ratios (thus the increasing spread at Wells) --they are still lending money (although still very conservatively) because they do have an abundance of low cost deposits. They also continue to make purchases and expand. They are easily a P/E of 15 company --so think what happens to earnings when they drop the reserves they need-- and then stock price.
The pessimists worry about dropping home values. There are really only three reasons home values matter -- if you want to sell your home or you want to borrow against it or you have an ARM and want to refinance to a fixed. Wells did not do a lot of ARMs -- the average length of a mortgage is about 12 years --most people have no reason to sell their homes right away and will just ride out this cycle. Wells also has a presence in markets where values are not dropping like they are in California --so they still have the ability to do Home Equity lending in other areas of the country (check out Texas).
Will they have more write-offs --of course --but they are no where near as bad off as some of the pessimists on this board indicate. If you think they are fooling people by hiding bad loans -- then they have a lot of people fooled -- they were just listed by an independent organization as one of the 10 safest banks in the world --the only American bank on the list -- Congress and the Fed have looked to Wells to determine how they avoided the mess other institutions are in -- they still have their Triple A rating --the only American Bank to have this rating. Even the few analysts who have rated them a "sell" or "underperform" are beginning to get on the stagecoach. Are all these people less knowledgeable than you? Is Buffet less knowledgeable than you?
When the stock price gets to $50 you will be saying I should have gotten on the stagecoach when it was in the 30's.

2008 Sep 28 11:29 PM

[somerville:]

Wells has been a winner for many years. (look at a 10-20 year chart.)They don't make dumb acquisitions. Thank goodness they stayed away from WAMU and Wakovia. They did not involve themselves in any option arm lending. No Negative Amortized loans! I know I worked there for 22 years in residential lending. We used to kid that our customers deserved a 'Gold Star" after being approved on one of their loans! Buffet knows his business.
The community has been rushing over to open their accounts with WFC this past month! (esp from WAMU) Add it up, there will be short term issues obviously, But definitely a hold on this stock and maybe even a buy..very soon.

2008 Sep 30 01:51 AM

[rb1253:]

watch what happens to WF if they eliminate the mark to market accounting rule as is being widely discussed--this more than anything has held back WF -- when they established this rule they never envisoned this type of environment and the impact it would have -- removing this rule significantly increases bank capital overnight for Wells and others --

2008 Sep 30 11:01 AM

[short WFC:]

rb1253: changing the accounting rules can make anyone even banks look good. problem is providing paper with no buyers some arbitrary value based on cash flow or whatever is likely short term bandaid that will make banks less transparent and therefore less valuable. if there was cash flow this paper would be valued at something and say WFC if its soo strong could buy it now. do you really think people will just start piling $ on WFC just because they start to value their marketless paper at some $B's?

btw SOMERVILLE..i live in somerville MA on prospect hill

2008 Oct 01 02:04 PM

[Gigi-1:]

Why don't we read about the 25B they got in the bailout money. That does not seem like this company knows what they are doing. They seem to be getting some of the biggest $ amounts.

2008 Nov 15 12:11 PM