Wells Fargo: Why This Mortgage King Should Be In Your Portfolio Now
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Wells Fargo (NYSE: WFC) is different from its big bank rivals. It has a growing national mortgage business. It is the largest home lender in the United States with $315 billion in mortgage loans. It continues to make good on its cross-selling strategy, with revenue gains in the double digits for the past quarter. And the fourth-largest U.S. bank by assets also has little exposure to troubled foreign markets in places like Europe. Its stock price has been rewarded, with shares trading at about 1.8 times its tangible book value, which is well ahead of the other three big banks, though on par with nation's regional banks. It makes the bank one of the safe bets among financial stocks.
Mortgage-related results have been the pinnacle financial litmus test at banks. Wells Fargo, the fourth-largest bank by assets, is in a good position. For instance, loan losses decreased to $2.4 billion in the first quarter of 2012, a decline of $245 million from the fourth quarter of 2011. This represented a charge-off rate of 1.25 percent, the lowest the bank has seen since 2007. It is also the best rate among its large bank competitors, which saw improvements as well. Bank of America (NYSE: BAC) had a charge-off rate of 1.8 percent, Citigroup (NYSE: C) saw a rate of 3.19 percent and JPMorgan Chase (NYSE: JPM) reported a rate of 2.19 percent. An improving economy, according to many analysts, helped to decrease this figure across the financial industry. In terms of delinquency rates, Wells Fargo was reported to be 7.6 percent, with Bank of America at 13.5 percent, Citigroup at 8.3, and JPMorgan at 11.5.
Another positive development in the mortgage sector has been refinancing. Wells Fargo leads the pack among the big four banks, refinancing 5 million loans in 2011. All banks have benefited from government initiatives, such as the Home Affordable Refinance Program (HARP), aimed at helping dig the country out of the current real estate hole. According to the Mortgage Bankers Association, the nation's refinancing activity increased about 4.2 percent to $275 billion last quarter. Wells Fargo, in particular, posted $2.87 billion in mortgage-banking income last quarter. This is due in part to revenue generated by refinancing loans. Wells Fargo also originates one in four of the nation's home mortgages and services the most loans in the country. But, exposure to the housing market is as much a concern as it is a positive; even CEO John Stumpf is keeping an eye on things, in particular home-equity loans. The bank has $117.5 in home-equity loans of which the majority, $42.8 billion, is in Florida and California. Neither state is a bastion of economic stability, with high unemployment rates in both.
Also unlike its large-bank competitors, Wells Fargo has avoided high-risk investments as well as foreign markets. In fact, 97 percent of its assets are in the United States, and only 5 percent of its loan portfolio is from foreign banks looking to sell off assets. A major part of its business plan is to cross-sell items to its customers, an initiative helped substantially by the Wachovia acquisition. Integration of the bank, which was purchased for $15 billion, was completed in the first quarter 2012. Wells Fargo says they have more than 6,000 "stores," or branches as most of us know them, across the country as a result. A.G. Edwards was another prize, adding a recognized investment arm to Wells. The bank reported an increase in its cross-sell ratio to 5.98 products per customer as of February 2012, compared to 5.76 percent in the same quarter of last year, a testament to the success in this arena. The results for the first quarter of 2012 include:
- Credit card penetration rose to 29.9 percent, up from 29.2 percent from the fourth quarter of 2011 and 27.2 percent from the first quarter of 2011.
- Consumer auto loan origination increased $6 billion, up 25 percent from last quarter and 10 percent from a year ago.
- Net interest income up 4 percent on the wholesale banking side.
- Non-interest income was up 22 percent from last quarter due to strong capital markets, insurance and equity investment results.
This led to an increase in net revenue of 14 percent, or $4.2 billion, in the first quarter of 2012. Analysts say the bank could see earnings per share hit 3.66 before the year is out. Now all eyes are on Wells Fargo's results on the east coast. Will its cross-sell game work in that part of the country? Other banks may be following the lead of Wells Fargo, including PNC Financial Services Group (NYSE: PNC). The regional bank made two mergers of its own that expand its footprint in the southeastern United States. PNC won a bidding war against BB&T to acquire the U.S. assets of the Royal Bank of Canada for $3.5 billion. It also purchased BankAtlantic, based in Tampa, Florida, a deal it completed in the second quarter of 2011. This adds a number of potential cross-sell opportunities of its own in a growth area of the country.
Wells Fargo is a safe buy at this time. Things are no doubt looking up. The question is just how much profit could you milk from this stock. I don't think there will be huge returns, but signs of Wells Fargo's safety can be seen in its most recent dividend announcement; the federal government gave Wells Fargo the green light with an offer of 22 cents per share, an increase from the 12 cents originally announced. And there's the Buffet factor. Wells Fargo is the second-largest holding of Berkshire Hathaway (BRK-B) with $13.7 billion invested in the bank. And Buffet, known for investing in companies with stable management and prospects, is buying more shares including another allotment worth $327 million. The only detractors of the stock, of which there are relatively few, are concerned with what is called Project Compass. The initiative is meant to carve Wells Fargo into a leaner bank, which some analysts say may be bad for a company focused on selling. In addition there are still macroeconomic waves that may rock the boat, possibly making expected double-digit increases in income hard to sustain.
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