Saturday, February 1, 2014

Wells Fargo Profit Rises Despite Mortgage Slowdown- 02/05/2014

WFC Wells Fargo & Company Money Center Banks USA
http://online.wsj.com/news/articles/SB10001424052702304549504579318670877522100

6 comments:

  1. Source:

    Annual report: Management discussion and analysis; Earning Performance;
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    Wells Fargo & Co. is a nationwide, diversified, community-based financial services company. Wells Fargo provides banking, insurance, investments, mortgage, and consumer and commercial finance
    Revenues—

    Revenue Net Income Revenue % Net Income %
    Community Banking 53.4 10.5 60% 54%
    Wholesale Banking 24.1 7.8 27% 40%
    Wealth, Brokerage, retirement 12.2 1.3 14% 7%
    Total 89.7 19.6 100% 100%

    FCF—
    WFC -43.22
    JP MORGAN -115.06
    BOA -80.82
    CITI -59.3

    FCF RATIOS
    FCF REV FCF/REV CFO FCF/CFO
    12/31/13 -43.22 83.78 -52% -43.22 100%
    9/30/13 21.1 85.06 25% 21.1 100%
    6/30/13 12.98 85.8 15% 12.98 100%

    Use of FCF—
    1, litigation settlement
    2, refinancing the real estate

    Efficiency Ratio—
    2011 2012
    JP Morgan 62.9 60.2
    WFC 61 58.5
    US Bench 66.5 64

    Nation’s largest mortgage generator—
    Wells Fargo's strategy of becoming the nation's largest mortgage generator has paid off handsomely in other ways. The bank's revenue has nearly doubled since 2009 to 2012. If this rate of increase keeps up, Wells Fargo's revenue might surpass Bank of America's in a few years.

    Too less cash on hand!

    Conclusion—
    Wells Fargo has figured out how to increase its business, but it is in a riskier position than other banks. Warren Buffett is taking a much bigger risk here than many of his fans will admit. Even though its revenues are rising, Wells Fargo is still on shaky ground.

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  3. Sources: annual statements declared by the company, business journal, WSJ.
    Wells Fargo is a community based financial services company that provides banking, insurance, investments, mortgage through 9000 stores, 12000 ATM’s and through online banking.
    Total net income in 4th Q is 5.6 B. It basically comes from 3 segments:
    Commercial side- constitutes 55% of their revenue. Revenue decreased due to low demand in mortgage sector, interest income increased due to credit and debit card usage, investment fees, Non-interest expense was low because there were costs in 2012 related to IFR.
    Wholesale banking- 36% of R, Revenue decreased due to loss in equity trading, lower sales. Net income increased due to growth in asset mgt, corporate banking and investment banking.
    Wealth, Brokerage and retirement- 8%. Net income, revenue increased, noninterest expense increased due to brokerage fees.
    Financial trends:
    1. Net income of $21.9 B, up 16% from 2012.
    2. EPS of $3.89, up by 16%
    3. Revenue in 2013 of $83.8B, compared with $86.1 B So revenue has gone down.
    4. $11.4 B in dividends and share repurchases.
    5. ROA is 1.51 percent, up 10 basis points and Return on equity (ROE) of 13.87 percent, up 92 basis points from previous year.
    6. Total loans are in 4th Q of 2013 are up $26.2 B from 4Q of 2012.
    7. Checking and Savings deposits have also increased by $50.7B.
    8. Improved credit quality led Wells Fargo net charge off amount to $963 M which is down from $1.1 B in 4th Q of 2012.
    9. Provision for credit losses have decreased which led to their strong financial performance.
    10. Interest income has decreased by 3% from 2012 to 2013.
    Important productivity measures:
    1. Efficiency ratio is 58.3% in 2013 which has improved from last year when it was 58.5%.
    2. Net interest margins is 3.39% for 2013 which is less than 3.76% reported in 2012 and it is also seen as declining from previous Q of 2012.
    3. Non-interest income which is service charges, card fees, mortgage banking fees, insurances have decreased by 4% from 2012 to 2013. Most revenues came from brokerage advisory and commission fees, investment banking.
    4. Capital levels are strong-10.82% Tier 1 common equity ratio under Basel I and Common Equity Tier 1 ratio of 9.78% under Basel III
    Strength:
    1. Cross Selling is a great strength of Wells Fargo, in WBR it has increased to 10.42 products per household from 10.27 products per household a year earlier.in Wholesale side, cross selling increased to 7.1 from 7.0 products per relationship they have with customer. In commercial banking, cross selling has also improved from 6.05 products to 6.16 products.
    2. World most valuable bank, with a brand value of over $30B.
    Conclusion: Net income increased, loans and deposits increased, revenue from Investment banking showed a significant improvement. This stock is a buy in my opinion.

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  4. Source: Bloomberg Terminal, 10Q

    --Segments:
    Community banking: 57.5%, 56.4%
    Wholesale banking: 27.5%, 36%
    Wealth, brokerage and retirement: 15.1%, 7.6%

    --Net interest income: 51% of net revenue
    Commissions & fees earned: 43.65% of net revenue
    Revenue growth rate: -3.5%; 5 year CAGR -1.1%; net income growth: 16.6%, CAGR 12.3%.
    The key reason for high NI growth rate: Provision for loan losses has declined from 21B in 2009 all the way down to 2B in 2013

    --Provision for credit losses yoy
    Community Banking: -72%
    Wholesale Banking: -308%
    Wealth, Brokerage and Retirement:-173%

    --Total loans: 1.7% increase in Q4 compared to Q3
    Total deposit: 13% increase in Q4

    --Profit margin:
    WFC: 26%, doubled in past 5 years
    BAC: 16%
    JPM: 23%
    CITI: 17%

    --ROE
    WFC:14%
    Industry avg: 7.18%
    BAC: 4.6%
    JPM: 8.36%
    CITI: 7.14%

    --Efficiency ratio: 57.87%
    BAC: 77.06%
    JPM: 59.24%
    CITI: 63.94%
    Excellent expense control in 2013
    The Company expects to operate within its targeted efficiency ratio range of 55 to 59 percent in first quarter 2014.

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  5. Wells Fargo Corp.

    Data source:2013 Q4 News Release/Thomson One database/MorningStar/Seekingalpha.com/WSJ.com/ forbes.com

    Business segment

    - Net interest income
    • Community Banking 67%
    • Wholesale Banking 29% (which serves medium and large business customers),
    • Wealth, Brokerage and Retirement 6%
    • Others -3% - Noninterest income
    • Community Banking 52%
    • Wholesale Banking 29%
    • Wealth, Brokerage and Retirement 25%
    • Others -6% - Net income
    • Community Banking 58%
    • Wholesale Banking 37%
    • Wealth, Brokerage and Retirement 8%
    • Others -3%

    Company revenue growth
    • Net interest income -1% growth
    • Noninterest income -4.4% growth
    • Net income 16%
    • Wealth management 5.6% growth in non-interest income and 29% growth in net income
    • Community banking revenue -5.7%
    • Wholesale banking revenue was flat

    Comments
    • Wealth, Brokerage segment / smallest/ fastest growing
    • cross-selling products
    • 15,268 financial advisors / cross-sell 10 products per household/ leader
    • See article http://www.forbes.com/sites/halahtouryalai/2013/07/12/the-fastest-growing-business-in-wells-fargos-earnings-report-may-surprise-you/

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  6. Fourth Quarter Record & Full year Record in 2013
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    S&P Capital
    Morning Star

    CORPORATE OVERVIEW
    3 business segment (Revenue %, Net income % Sales Growth % in 2013)

    Community Banking 57% 56% -11%
    Wholesale Banking 27% 36% -0.3%
    Wealth, Brokerage and Retirement 16% 8% 9.7%

    Community Banking (Core Business)
    Key Revenue Drivers:
    1. Mortgage Banking:
    - Total average loans were 1%from the prior quarter, driven by commercial and industrial, 1-4 family first mortgages and the full quarter benefit of portfolio acquisitions in the third quarter
    2. Cross Selling:
    - In the 4th quarter, Well Fargo's retail banking cross-sell grew to 6.16 products per household. Wholesale banking and wealth, brokerage and retirement cross-sell improved to 7.1 and 10.42 products

    FINANCIAL TRENDS
    FCF
    - FCF/OCF 17% in 2013
    - FCF/Revenue 10% in 2013
    Use of cash flow
    - Pay Dividend & Repurchase: In 2013 WFC returned $11.4 billion to shareholders through dividends and share repurchases.
    - Reinvestment: WFC has15% increase in purchase of investment
    - Pay down debt: WFC pay down almost 12% of long term debt
    Credit Quality & Net Loan Charge Off
    - improved credit quality metrics in the quarter
    - Net charge-offs were 0.47% of average loans in theQ4, down from1.05% last year.
    Capital Position:
    - Wells Fargo has maintained a solid capital position.
    - Tier 1 capital ratio was 12.33% as of Dec 31, 2013 compared with 11.75% as of Dec 31, 2012.

    - Net income is up 16% from 2012
    - Return on average assets (ROA) of 1.51 percent, up 10 basis points
    - Return on equity (ROE) of 13.87 percent, up 92 basis points
    - Net interest income is up 2% year over year.
    - Non-interest income is down 13%

    INVESTMENT RATIONAL/RISK
    PRO
    - Cross - selling
    - Strategic Acquisition:
    - Credit quality continues to normalize

    CON
    - Net interest yield pressure:
    - Mortgage decline
    - Litigations issues

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