Buffett’s Addiction to Wells Fargo: What's in it For You?
Adnan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
In an article on Bizjournals.com, Mark Calvey reported that Wells Fargo (NYSE: WFC) has become Warren Buffett's largest holding. Besides covering the news, this article aims to find out reasons why the bank has become Buffett’s favorite stock and can investors still find reasons to follow Buffett.
The addiction
Wells Fargo has mostly been part of Warren Buffett’s holdings. However, according to Mark Calvey, the bank has now replaced the long-standing top holding Coca-Cola. Buffett’s Berkshire Hathaway (NYSE: BRK-A) has been adding the San Francisco based bank for a few years now. According to the latest regulatory filings of Buffett’s fund, 17.3 million shares were added during the prior quarter alone. This brings Buffett’s stakes to 9% in Wells Fargo.
Competitive advantage
Buffett has identified the bank’s low cost of funds as its primary advantage in the lending business. Besides, he believes the bank is prospering and has a more than adequate capital base, assets with high quality and a solid track record of strong earnings.
For the fourth quarter of 2012, the bank posted record net income of $5.1 billion, up 3% sequentially. Similarly, Revenues of $21.9 billion climbed 3% over the same time period. While core deposits were up $34.9 billion, the bank’s core loans portfolio surged $34.9 billion over the linked quarter. The bank displayed strong credit performance during the recent quarter as its net charge-offs came down by $227 million. The asset quality as represented by non-performing assets to total loans improved 16 basis points to 3.07%. Wells Fargo’s Basel 1 tier 1 common equity ratio came in at 10.12%, up from the prior quarter’s 9.92%. During the recent quarter, the bank’s interest expense, which is the cost of funding, came in at $399 million, down 21% from a year ago. These reasons explain Buffett’s addiction to Wells Fargo.
Catalyst in imbalance
Going forward, I believe Wells Fargo is well positioned to benefit from the changing macroeconomic situation post-2008 crisis. Despite the Fed’s best efforts to speed up the US housing recovery, large mortgage lenders are shying away from spreading funds, causing a void and impeding the housing recovery. Particularly, Citigroup (NYSE: C) and Bank of America (NYSE: BAC) have shown their reluctance in originating mortgages. Their reluctance has led the largest five mortgage lenders’ share down from 66.7% in 2010 to 53% in 2012. Citigroup witnessed a 5% decline in its mortgage originations during the third quarter of 2012, while reported 37% decline from a year ago.
The largest lenders’ reluctance and increased demand for housing has led to an imbalance, causing the mortgage rates to edge up. This imbalance is the biggest catalyst for Wells Fargo, who is willing to cover the void. Therefore, I believe investors can still expect Wells Fargo to outperform Citigroup and Bank of America in the coming quarters.
Conclusion
While Wells Fargo becomes Buffett’s top holding, it still has value for you. The bank has a strong performance track record with improving asset quality and capital. While Buffett’s is addicted to the bank on its exceptionally low cost of funds, the imbalance in the supply and demand of mortgage is Wells Fargo’s biggest catalysts going forward. Therefore, I believe while the bank has already appreciated 3% since the beginning of the year, it still has value for you. Therefore, I recommend investors follow Buffett and buy the stock.
equityfinancials has no position in any stocks mentioned. The Motley Fool recommends Wells Fargo. The Motley Fool owns shares of Bank of America, Citigroup Inc , and Wells Fargo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!
