Reliability in the Banking Sector

By Maxwell Fisher - July 30, 2012 | Tickers: BAC, JPM, UBS, USB, WFC | 0 Comments

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There is no doubt that Wells Fargo (NYSE: WFC) is one of the best, if not the best asset to own in the banking sector. Wells Fargo continues to grow organically without overextending itself. It is currently the U.S bank with the largest market cap. Guided by a superior business model and greater earnings, Wells Fargo is beginning to outshine JPMorgan (NYSE: JPM). The main catalysts behind Wells Fargo’s success in the second quarter were the increased earnings and growth in its mortgage division in conjunction with capitalizing on customer retention from effective cross-selling to households throughout the U.S. Even in the face of litigation or bad publicity, Wells Fargo is proactive, easily turning a potential hindrance into a positive opportunity. Below, I will show why Wells Fargo will continue to be the most reliable banking asset to own throughout the rest of 2012.

Wells Fargo’s growth rate so far this year stands 50 percent higher than the industry average. Its growth rate for the last five years has been positive, significantly higher than the industry average which is running at a deficit. While Wells Fargo’s projected growth rate for next 12 months is 15 percent lower than the industry average, its projected growth rate for the next five years is 10 percent higher than the industry average. Its trailing 12 months price is slightly less than the industry average. Both Wells Fargo’s price to book and price to cash flow ratios are slightly higher than the industry averages. Wells Fargo’s are reasonable and fairly in line with the industry at large; it’s clear to see why it has emerged as the leader in stability among all the major banks.

One of the most attractive attributes of Wells Fargo’s business model is its ability and effectiveness in cross-selling to its current customer base. This focus on cross-selling exemplifies Wells Fargo’s disciplined and long-term approach that drives all of its successful operations. Wells Fargo’s customers in the western part of the country have an average of 6.1 products with the bank per household. In the east, the bank’s customers have an average of 5.1 products per household; this number is currently increasing. The total of the 39 community banking states, including D.C, have an average of 5.7 products per household; this is an increase from 5.47 last year. Around 25 percent of Wells Fargo’s customers have eight or more products per household. Around 40 percent of the Wells Fargo’s customers have six or more products per household. This focus helps Wells Fargo retain customers because they are less likely to leave once they have so many products and services with the bank. This is an effective defense against domestic competitors like Bank of America (NYSE: BAC) or USB (NYSE: USB). Alongside Wells Fargo, USB is one of the few banking institutions that adhere to a conservative business model. This has helped USB avoid bad publicity from financial scandals or blunders regarding risky derivatives or rate manipulation.

The LIBOR investigations are affecting all the banks. UBS (NYSE: UBS) has been already been identified as a culprit of fixing rates. Aside from UBS, news came out earlier this month that Bank of America will be investigated as well. This will be a hindrance on Bank of American as it has been working to improving its public image with more conservative investments. JPMorgan has had its own problems with the CIO and loss of 4.4 billion in the first half of 2012, despite its positive earrings report. Wells Fargo recently settled with the DOJ from accusations of discriminatory lending from independent mortgage brokers. It’s important to note that these were not Wells Fargo employees, regardless of the fact, Wells Fargo settled for $125 million to the borrowers despite its denial of any wrong doing. Wells Faro has also committed to contributing $50 million to Baltimore community improvement programs and seven other metropolitan areas that the DOJ identified as needing help to recover from the housing crisis.

Wells Fargo turned a potential public relations nightmare into an opportunity to imbed itself as an integral proponent for improving the housing market throughout the country. In 2Q12, Wells Fargo has a record net income of $4.6 billion, a 17 percent increase YOY and nine percent sequentially. Revenue rose to $21.3 billion, an increase of four percent YOY. This is the 10^th consecutive quarter of EPS growth. The success in the mortgages division signaled a strengthening housing market. Purchase volume increased to over $19 billion, this was a 43 percent increase from the first quarter. Wells Fargo saw an increase in sales as well as pricing throughout the United States in 2Q12. Wells Fargo also added key acquisitions of various loan portfolios to strengthen its own assets. 

Wells Fargo has avoided the bad publicity stemming from risky investing or poor corporate governance that has been plaguing the banking industry on a weekly basis. The housing market is at its highest point while Wells Fargo had a promising quarter from its mortgage division. This is an intriguing scenario, especially if Wells Fargo is the catalyst behind the macroeconomic success. Better yet, Wells Fargo’s management shows no inclination to stray from its model or overextend itself in the face of a potential mid-term lull. Currently, international banks like UBS, Citigroup (C) and JPMorgan are risky assets to own while domestic firms are more stable. Wells Fargo is a consistent, reliable and promising asset for steady capital appreciation throughout 2012 and beyond.

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