Together we’ll go far. Should investors catch the Wells Fargo Stagecoach?
The Wells Fargo Stagecoach was the finest passenger vehicle of the time. It averaged 5 miles per hour and changed horses every 12 miles. One passenger described the journey as; “a through-ticket and 15 inches of seat, with a fat man on the one side, a poor widow on the other, a baby in your lap, a band box over your head, and three or more persons immediately in front, leaning against your knees, making the picture, as well as your sleeping place, for the trip.”
Well that was in 1852 and thank goodness times have changed.
Today Wells Fargo is the biggest bank (by market capitalisation – value) in the world overtaking Industrial & Commercial Bank of China this year. It is an American multinational banking and financial services holding company with operations around the world.
In the last reporting period for 2012 Wells Fargo generated strong financial results in spite of an uncertain economic and political environment.
Return on assets of 1.41% was up 16 basis points from 2011, the highest level in 5 years, and return on equity increased to 12.95%.
Nett income was $18.9 billion and diluted earnings per share was $3.36 for 2012, each up 19% from 2011.
Wells Fargo led in small business lending, home mortgage lending, auto lending and private student lending.
They provided a safe and sound place for customers to hold and manage their financial assets and served their customers efficiently and conveniently through the nation’s most extensive network of banking stores and more than 12 000 atms.
This was accomplished with a cross-sell strategy that continues to distinguish Wells Fargo as a leader in building customer relationships. Cross-selling is a major and successful strategy that Wells Fargo has always been good at and one which it continues to perfect. This constant encouraging of existing customers to buy additional banking products is a key strength and competitive advantage.
This cross-selling mindset produced records in the average number of Wells Fargo products per customer. At the end of the 4th quarter, the average Retail Bank Household had more than 6 products, the average Wholesale Bank customer had nearly 7 products and the average Wealth Brokerage and Retirement customer had 10 products!
Bank investments, however, can be tricky. Banks can fail and often do. Most failures are the result of management. Loans are made that a rational manager would never issue. Banks are leveraged, often by more than 20 times shareholders capital, so any irrational lending can quickly destroy the balance sheet.
Nevertheless banks can be excellent investments and good managers can generate a return of 20% on equity which is above the average return generated by most businesses. Just like any business the assets, liabilities and costs must be managed correctly.
Banking, like insurance, is really a commodity business. And as we know commodity businesses are cyclical and intensely competitive. The only factor that will guarantee a modicum of success is if the business has an excellent management team.
Wells Fargo, arguably, has the best management team in banking. The managers run the business for the benefit of shareholders and are legendary when it comes to controlling costs.
John G. Stumpf, Chairman, President and Chief Executive Officer, Wells Fargo & Company, summarises the outlook as follows: “in conversation after conversation last year – across kitchen tables, as well as conference room tables – we heard of signs of a strengthening US economy. Still, we also observed the worries and uncertainty that influenced consumer and business behaviours in many areas of the country and the economy.
Yes, low interest rates offered a compelling opportunity to get household balance sheets in order. And there were bright spots, such as energy, that reminded us of the advantages our US economy still holds. But overall, our customers remained cautious given the economy’s tepid growth and headlines about Washington Gridlock, budget pressures and high taxes. So, while we remain optimistic for continuous economic expansion in 2013, we do so guardedly, based on what we have experienced in 2012”.
So there you have it! Are you ready to catch the Wells Fargo Stagecoach?