Wells Fargo (NYSE:WFC) is the most interesting of the U.S. monster banks, because its' revenues are actually growing. That stands out because its immediate competitors are grappling with serious revenue declines.
Wells Fargo's revenues grew by $910 million during first quarter 2016; rising from $86.06 billion in December to $86.97 billion in March. During the same period; Bank of America's (NYSE:BAC) revenues fell by $1.4 billion, JPMorgan Chase's (NYSE:JPM) revenues fell by $820 million and Citigroup's (NYSE:C) revenues fell by $2.18 billion.
What is more interesting is that Wells Fargo is in a period of sustained revenue growth. Its revenues grew by $3.46 billion between March 2014 and March 2016; rising from $83.15 billion to $86.97 billion. During the same period Bank of America lost $6.66 billion in revenue, Chase lost $2.74 billion, and Citi lost $2.51 billion in revenue.
Will Wells Fargo Become America's Biggest Bank?
It looks as if Wells Fargo is the only of the big banks with a growing business. Its revenue has surpassed that of Bank of America, BOA reported $81.65 billion in revenue on March 31, 2016. More intriguingly Wells Fargo's revenues might soon rival or exceed those of JPMorgan Chase which were $92.72 billion in first quarter 2016.
That means Wells Fargo might soon become America's largest bank in terms of revenue. Not surprisingly many people will wonder if this means that Warren Buffett's faith in Wells Fargo is well placed.
Berkshire Hathaway (NYSE:BRK.B) now owns around 10% of Wells Fargo; 504.3 million shares, Market Watch reported. Buffett's company purchased 24.6 million shares in March to increase its stake just before earnings report time.
Why is Wells Fargo Growing and is that Growth Sustainable?
This raises two important questions: 1) why is Wells Fargo growing and 2) is that growth sustainable?
One major engine driving Wells Fargo's growth is an increase in lending. The amount of loans the bank had out grew by 3% or $30.7 billion during first quarter 2016, Well Fargo's earnings release indicates. Much of that increase consisted of a purchase of $24.9 billion in debt from GE capital acquisitions.
Naturally persons who remember the financial meltdown 10 years ago will be skeptical of these numbers. They will wonder how many of those loans are really making any money.
On paper at least Wells Fargo's debt looks diversified; with $48.8205 billion in commercial loans, and $45.9053 billion in consumer loans. Those looks can be deceiving because those figures include everything; from residential mortgages to commercial leases. Those loans generated around $11.7 billion in interest income.
The most important thing we can learn here is that growth in lending is slow. The major growth is coming from acquisition and new loans. Other potential problems here include the potential quality of loans
A more interesting figure is an increase in deposits; which grew by 4% during the first quarter. That indicates growth in basic consumer banking and market share. Wells Fargo appears to taking some market share from its competitors.
Stagnant Incomes and Real Estate Market Threaten Wells Fargo's Future
It looks as if most of Wells Fargo's revenue growth is organic from its core business. That growth is real but it may not be sustainable, because it is dependent on continued on U.S. economic growth. A major potential threat here is stagnant incomes in the U.S.
That's already being felt in some areas of the bank's business including mortgages. Noninterest income from mortgages at Wells Fargo fell by $62 million during first quarter because mortgage production fell. The amount of new residential mortgages fell by $3 billion.
The main lesson we can learn here is that; despite the wild real estate bubbles in places like San Francisco, the U.S. real estate market is stagnant. Average people simply are not buying homes; which is a long term threat to Wells Fargo, and similar institutions.
The reason people are not buying homes is obvious they do not have the money. The income of the average U.S. household was 8% lower in 2014 than it was in 1999, the Pew Research Center reported.
When adjusted for inflation the average middle class household was making $77,868 a year in 1999 and $72,919 a year in 2014, Pew estimated. That means the average middle class household's income fell by around $5,000 in 15 years.
These numbers who us that there is little hope for growth in Wells Fargo's banking business in coming years. Any large income growth will have to come in commercial lending or consumer banking. Fortunately for Wells Fargo the future of those markets looks bright.
Wells Fargo is making Money
The good news for value investors is that Wells Fargo is making money in spite of income stagnation. It reported generating $17.55 billion in cash from operations, a net income of $4.075 billion and a free cash flow of $5.292 billion on March 31, 2016.
That gave the company a profit margin of 24.61% and a diluted earnings per share figure of 4.075. It also translated into a very healthy level of float, Wells Fargo reported making $96.42 billion in cash from financing and holding $98.43 billion cash and short-term investments on March 31, 2016.
All this proves Buffett right, Wells Fargo is a very healthy bank that is not affected some of the weaknesses in the U.S. economy such as wage stagnation. It is also a great investment, Uncle Warren and other shareholders were rewarded with a dividend yield of 3.3% and a return on equity of 13.27% during the first quarter.
If you want to add one of the monster banks to your portfolio, Wells Fargo would be a good pick. It has excellent growth prospects and at $47.03 a share it is cheap right now.