Wells Fargo thunders to a buy among financials «
For many, the name Wells Fargo conjures up images of the American gold rush and their iconic six-horse stagecoach. Today, investors and consumers know of Wells Fargo as a major U.S. banking institution that has a 160-year history, approximately 70 million customers and deals with a significant number of households in America. And it may be a terrific play for investors looking to take advantage of the banking sector.
Wells Fargo /quotes/zigman/239557/delayed/quotes/nls/wfc WFC 0.00% has scale like no other bank in the country, as it is a leader in small and mid-sized businesses, residential-mortgage origination/servicing, commercial real-estate origination and middle-market and direct auto lending. As of December 31, 2012, they had more branches and served more communities than any other bank in the U.S., according to Tim Sloan, Senior EVP and CFO, in a speech at the Citi U.S. Financial Services Conference.
This enormous scale has given WFC the ability to focus on their core growth strategy, which is cross-selling their very diversified list of financial products, including credit cards, mortgages, personal lines/loans, student loans, auto loans and wealth-management services.
Cross-selling has also led to a much higher ratio of products per customer, with a much longer tenure, as compared to other similar banks. Sanford and Bernstein report that at the end of the fourth quarter of 2012, the Wells Fargo retail-bank household cross-sell was 6.05 products per household, which was up from 5.93 a year earlier.
Wells Fargo management believes that they can increase this number to 8.0 per household, which is approximately half of their estimated potential demand for an average U.S. household. Sanford and Bernstein also state that at the end of the fourth quarter 2012, one in four households had eight or more products per household.
Some investors have been focused on WFC’s reduction in net interest margin (NIM) and are expressing concern over the fact that it declined by 71 basis points from the first quarter 2010 through the fourth quarter 2012. A 71-basis-point reduction in NIM is significant, but this figure was negatively impacted because the bank enjoyed $172 billion in new deposits over that same period of time.
Understanding that management’s focus is on cross-selling financial products and services, it becomes clear that the new deposits of $172 billion will create an enormous opportunity for growth in lending and fee generation, and possibly the NIM reduction is temporary. We could see more NIM reduction in the short-term, because it appears that the new bank deposits will keep coming.
According to a recent study by Sanford C. Bernstein, Wells Fargo is seeing enormous deposit growth in the northern plains states, which is a key area of the emerging U.S. energy boom. According to the report, business customers in that region are flooding the banks with new cash, and WFC had the most deposits in all five states.
Wells Fargo’s management team does not manage to NIM, but is more focused on net-interest income. Additionally, WFC has a balanced business model, with revenue diversification from their various lending activities across consumer and commercial customers, and by non-lending activities such as banking fees, trust and investment services fees, card fees and insurance.
During this period of time, when NIM was dropping, Wells Fargo still posted record earnings-per-share growth, which speaks to how important their revenue diversity is to the bottom line. In fact, WFC has recorded 12 consecutive quarters of EPS growth, including seven quarters of record EPS growth, all during a tough period of time that included substantial regulatory change, declining interest rates, uneven economic growth and European and Asian economic challenges.
Cross-selling has also led to a much higher ratio of products per customer, with a much longer tenure, as compared to other similar banks.
As an investor, we search for management teams that demonstrate concern for their shareholders, by being good stewards of our money. Wells Fargo continues to be shareholder focused, illustrated by their continued desire to return capital to shareholders through the payment of dividends and repurchase of shares and/or smart acquisitions.
The company increased their dividend payout by 83% year-over-year, and repurchased 120 million shares in 2012. As of April 10, 2013, WFC was trading at $37.75/share with a P/E ratio of 11.24 and a 2.64% yield. With management’s focus on returning capital to shareholders and their focus on EPS growth by gaining market-share and cross selling, WFC is a solid holding for the long-term.