Company Overview
Since this is a very famous company, let’s just briefly cover it. Wells Fargo is the third largest bank in the United States with assets of $1.7 trillion. The main business sectors are the same as any other bank. These include consumer deposits and loans, corporate loans and investments, and customer asset management.
Recent Performance
Financial Indicators2024 Q1 PerformanceYoY ChangeTotal Sales$19.925 billion+2.1%Net Profit$4.619 billion+3.0%Net Interest Income (NII)-8% YoY-8%Non-Interest Income+17% YoY+17%Net Interest Margin (NIM)2.81%-39bps2024 Q1 Performance Summary
In the first quarter of 2024, Wells Fargo's sales were $19.925 billion and net profit was $4.619 billion. Net interest income (NII) decreased by 8% compared to the previous year, and net interest margin (NIM) decreased to 2.81%. On the other hand, non-interest income increased by 17%.
Key Issues
Decrease in net interest income
An obstacle to Wells Fargo's growth is the decline in net interest income. In short, the reason for the decline in net interest income can be attributed to the increase in interest rates. You might say that you are earning more because interest rates have risen, but that is not true. Not only will banks' funding interest rates increase, but the total amount of loans may also decrease. In addition, due to high interest rates, money from non-interest to low interest deposits and frequent deposit/withdrawal accounts such as CMAs, which consumers did not pay much attention to, will be moved to high-interest accounts, thereby increasing the cost for banks to attract customers' money.
Increased operating costs
Wage growth due to inflation in recent years is also one of the risks cited by many analysts. In response, workforce reductions and branch reductions continue, but pressure to increase costs still continues. However, I personally believe that these concerns will improve at a much faster rate than expected with the introduction of AI. Generative AI already has the potential to replace many banking tasks. There is no specific information on how to use it, but it appears that Wells Fargo is also aware of this and is active in introducing it.
Increased non-interest income
This is the fee income and investment income generated from asset management and various services. The increase in non-interest income is encouraging in that it alleviates profit volatility due to interest rate changes compared to interest income. Since the main source of non-interest income is fees for various services such as asset management, it also contributes to increasing customer retention rates.
Regulatory Risk and Management Risk
Wells Fargo caused an unprecedented incident in which it opened millions of counterfeit accounts without customer consent, and has been subject to asset limit regulations that limit its assets to $1.95 trillion since 2018. In response, the company is striving to strengthen regulatory compliance and internal audit through organizational reorganization, while also investing in technology to detect and respond to internal problems such as abnormal transactions.
Despite these efforts, Warren Buffett sold all of Wells Fargo, which had been a pillar of his portfolio for the past 30 years, in the first quarter of 2022, which became an issue. Although the detailed reason was not disclosed, it took issue with banks' excessive risk-taking propensity. They mentioned Wells Fargo as a specific example, but they took issue with the entire banking sector and actually sold off or drastically reduced the proportion of most banking stocks except BOA.
Stable financial structure and shareholder return policy
Wells Fargo maintains high capital ratios. The CET1 capital ratio is 11.2%, which is significantly higher than the minimum of 4.5% regulated by Basel 3. This means that it is financially very stable and has sufficient capital to prepare for uncertainty. The debt ratio is also maintained at a relatively low level, so it can be expected to be able to respond well to volatility in the financial market.
Wells Fargo also has an active shareholder return policy. In the first quarter of 2024 alone, it purchased $6.1 billion worth of shares, and repurchased as much as a third of issued shares over the past decade.
In the case of dividends, there was a significant cut in 2020, but it has continued to rise since then. The dividend rate is around 2-2.5%, and as of June 7, it is 2.4%.
Investment Opinion
Solid sales and profit growth is underway, and profit structure is improving. The decline in net interest income is something that can be recovered when high interest rates are prolonged and interest rates are lowered, and the increase in operating costs is also expected to show a faster improvement than market expectations.
The direction of focusing on core industries to make up for asset regulations appears to be effective. Although it is not at a stage where the exact timing can be said, it appears that steps to ease regulations are continuously being taken. Profit improvement trends, financial stability, and even expectations of deregulation. It is judged to be not a bad stock to be in charge of as a bank stock port.