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jclyak
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JD, CPA, 18 years CEO/CFO, investor for 50 years
  • Wells Fargo's (Banking Industry) "9-9-9 Plan" 2 comments
    Feb 28, 2012 8:22 PM | about stocks: WFC, BAC, JPM
    Wells Fargo has lost about $2 Billion a year of fee income thanks to Congress. Making up for this in a transparent way is subject to a ton of negative scrutiny and is essentially impossible, unless Wells and other banks are a bit sneaky going about it. Here's how Wells Fargo can make up for all the lost fee income bestowed on it by Congress:
    • 9 more points on loan originations (including homes)
    • 9 more points in interest; and
    • 90 cents per month more fees per customer
    I believe home loan originators, including Wells are already rightfully asking for more fee income on loan originations. In fact Stumpf recently declared that "margins (as well as origination volume) are up.
    With a run rate of $140 billion a Q for home loan originations, a 9 basis point increase in fees ($180 on a $200,000 loan) would yield $126 million a Q in fee income that is generated below the radar of bank critics, including Congress. Add a simlar increase to all loans originated and I believe Wells generates about $200 million a Q in added revenue...without complaints.

    If Wells simply increases interest rates on its loan book of $$900 billion by 9 basis points over the next 3 years relative to historical levels, it drops an added $810 million/year in undetected revenues.

    Next, figure out how to nickel and dime its 45 million customers to the tune of $.90/month in terms os processing fees, minimum account balances, money orders, etc. In fact, just dropping rewards on debit cards would probably come close to doing this. Net result: $486 million/year in added revenue.

    The total of these items is $2.1 billion a year.

    What's my point?

    Let's draw an analogy to the insurance industry after a natural disaster. Premiums go up for a period of years thereafter and it's pretty much accepted.

    In the case of banks, we've just been through a perfect storm of losses, largely caused by huge pass-thrus of costs to banks (on top of direct loan losses). Furthermore, the government has said banks can't charge for lots of things in a traditional manner and banks must exit traditional and profitable investment bank businesses to wit: Prop trading, derivatives and hedging.

    In short, all banks need revenues and they all know it. The environment for raising fees of all sorts has never been better.

    Contrast Wells with BAC and JPM. Both the latter have been vastly more impacted by the loss of investment bank sorts of revenue than Wells. Additionally, they are vastly shrinking their home lending businesses, making their revenue base even smaller relative to Wells. Net reult: Other banks need to raise revenues much more than Wells does because Wells had no investment banking business to lose and it is growing in home lending.

    I believe bank margins (on all products that are not directly quantifiable by bank gadflies) are skyrocketing, especially for Wells. Let's call it the "9-9-9-9-9-9-9" program. Not only is Wells vastly increasing its market share in all categories, but its margins are going thru the roof IMHO.

    Disclosure: I am long WFC.

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  • HiOnROI
    , contributor
    Comments (2) | Send Message
     
    Sounds like a good plan, Herman, but I have a couple of questions.

     

    How can you expect Wells Fargo to increase fees to customers without upsetting many of them, especially in an age where people expect better service for less? Unless all banks hammer their customers with fee increases simultaneously, won't some jump ship from Wells?

     

    Do you believe simply making up for lost revenue will put Wells ahead of the other major players in the industry? Won't they all be raising fees?

     

    Without a doubt, Wells has gotten A LOT of positive press lately. With the article in FORBES, Buffett bragging on CNBC, and even Kramer jumping on the bandwagon. If this common stock is one of the better banking stocks, when will we see some results? All signs seem to be pointing toward WFC being one of the best banks out there, but there's no movement in stock price.

     

    What gives?
    27 Feb 2012, 04:33 PM Reply Like
  • jclyak
    , contributor
    Comments (165) | Send Message
     
    Author’s reply » Thanks HIONROI (Like that name!)

     

    It's nice to have some intelligent conversation on Wells Fargo.

     

    The whole point of my post is that these are tiny subtle movements in the fee structure...."broaden the base...lower the rates!" I believe the bumps in all these fees have already transpired. To the chagrin of the liberal bank-bashing bloggers, nobody can figure out a 9 basis point shift...or a 29 basis point shift for that matter. LOL

     

    My perception on the stock price is that Wells is "between audiences," much like being "between jobs." Historically the bank/Wells investor fan base was "safe" high-dividend income long-term investment with a nice stock price appreciation element. Let's just call this the "Family audience" in Roy Scheider's movie All That Jazz.

     

    The family audience invested in big banks for security. One step up from FDIC insured CDs. Along comes 2008 and the entire sector is exposed as a disaster and the average investor lost 85%of their "safe money." ..."There goes the family audience.

     

    Wells didn't lose investors any money since 2003 (nor did it make them any). Wells now shows signs of being back to its old glory. In fact, I think it has transformed from an 800# gorilla to a "Transformer" in terms of its strength, pricing power and other metrics. As Buffett said today, it's priced well below its intrinsic value....I believe way below.

     

    All Wells needs now is the return of the "Family audience" or another group of supporters of the stock.

     

    Truth is, I believe the Family Audience may be gone for another decade. They aren't interested in Europe risk, derivatives , prop trading and litigation...they want safe and sane.

     

    Along comes Buffett and Forbes. This coupled with 2% return on long-term treasuries and we just might get a Wells stock support audience sooner, rather than later.

     

    Buffett would like to see the Wells stock depressed for 5 more years while he and the company buy on the cheap...I'm a little less patient.
    27 Feb 2012, 10:24 PM Reply Like
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