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jclyak
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JD, CPA, 18 years CEO/CFO, investor for 50 years
  • Book Value Analysis Is Completely Irrelevant To Wells Fargo 2 comments
    Mar 23, 2012 2:24 PM | about stocks: WFC, USB
    Once again a noted bank analyst this morning on CNBC, on a bullish note, stated that major bank stocks have room to move up. The only problem is that he hopes they can move all the way up to 1.3 times book value.....wow!

    This gets a little problematic for investors in Wells Fargo, WFC that currently trades at 1.37 times book value and US Bancorp USB that trades at 1.93 times book.

    I find it to be totally incredulous that anyone would consider book value for these two banks. The inclusion of these banks in book value analysis has obviously been rejected by the market for good reason and these lazy analysts need to distinguish Wells in particular from this broad brush approach.

    Wells Fargo is the nation's most valuable bank by market cap. Isn't it time you spent a couple of minutes to learn and articulate why it is different than Citi, BAC and even JPM? (In fact it would be nice if CNBC started to put Wells on top of the bank quote chart, instead of ignoring it)

    Listen analysts: Book value of a bank and in particular, tangible book value, is only relevant if a bank's earning power is so low that it has no business value...ie. it is only worth as much as its parts on a fire sale. (Even then, book is a pretty dubious indicator of value)

    Ponder the book value of the following assets:

    • Deposits: What is the book value of $920,000,000,000 of virtually no interest rate deposits? $0 (actually I think they have a $12 bill asset for acquired deposits that is amortizing at $2 bil./year and wrongfully hurting earnings)
    • Wachovia Bank: It has a book value as an asset on Wells Fargo books of around $12 billion, the amount paid for it. It was worth around $100 billion a year before Wells acquired it in an extreme fire sale.
    • Wells has spent $6 billion over the last 3 years integrating Wachovia into Wells. What's the book value of these costs? $0
    • What's the book value of the Coke formula that generates $ billions of annual profits? $1
    • What's the book value of any asset that earns returns that are vastly greater than the book value indicator of "value?"...Yup...it's still BOOK VALUE
    OK, what would the market pay for $920 billion of interest free deposits that can be invested @ 5%? More than $0?

    How about these other assets? More than book?

    In all fairness, the analysts keep limiting the projected value of the banks because they believe their earnings prospects are limited by Dodd Frank (but what the hell does this have to do with book value?)

    Dodd Frank, in particular, the Prop trading and Volcker rule will hurt bank earnings of those banks that relied on these sources for core income...NOT WELLS FARGO

    As long as analysts take such a lazy, one size fits all analysis of big banks they are themselves "irrelevant" and people that will actually look under the hood will profit.

    BTW in 2003 both Wells and USB traded at 3 times book and I believe, if earnings so justify, they'll return there within a couple of years.

    Disclosure: I am long WFC.

    Themes: Bank Book Value Stocks: WFC, USB
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  • HiOnROI
    , contributor
    Comments (2) | Send Message
     
    Great post, jclyak.

     

    There are actually many articles written about this topic...book value for banks just doesn't make sense in most cases. Especially in the case of WFC as of now.

     

    I'm not an analyst, nor am I great at complex calculations and evaluations...but I'm good at basic math and business.

     

    Most businesses' "book value" is really equal to one of two things: a) a multiple of it's DCF or b) a sum of it's assets (if there is no or little DCF)

     

    Since banks hold onto a boatload of CASH, I believe it's earning power is more important than it's so-called "book value" that analysts talk about all the time. Besides, it's assets are actual CASH, which doesn't depreciate as much as machines, equip, etc.

     

    WFC can borrow more CASH cheaper than any other bank out there right now...making it's earning potential even greater. I'm surprised the common stock has stayed as low as it has, especially with the string of good news following this great bank.

     

    I wouldn't be surprised to see this bank stock blow past 40 this year, considering it's earnings!

     

    Disclosure: I'm long on WFC too.
    24 Mar 2012, 02:03 PM Reply Like
  • jclyak
    , contributor
    Comments (166) | Send Message
     
    Author’s reply » Yup ROI,

     

    I can't get over analysts considering that anything above 1.3 times book is too much. The book value of cash is in fact equal to the cash, however if the cash is funded by $920 billion of hard-earned deposits with $0 interest, how can that possibly be the same, or anywhere near the same as debt-funded cash's book value?

     

    The book value of a bank with 80% of its cash funded by institutional short-term borrowing (that bears much higher interest...a la BAC debt at 270 basis points over treasuries) that can be called by another bank at any time is exactly the same as that of Well's deposits

     

    I believe if capable a buyer existed, they'd pay Wells $250 billion for its deposits alone. If they earn 4% over costs (they do!), they generate $36 billion a year. In more normal times the income has been 20% higher for Wells

     

    As for $40...Wells needs to start surprising on earnings. They will for the reasons articulated on my first post here with the 2003/2011 comparison. I think we'll get the first installment on 4/13, followed by much juicier bites the subsequent 2 Q's.

     

    I'm thinking we'll leap right past $40 when Wells demonstrates that it can earn $5+ a share annually within a year.
    25 Mar 2012, 08:10 PM Reply Like
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