An Analysis of Wells Fargo & Company (WFC)

Wells Fargo & Company (WFC) is a large Western and Midwestern financial institution that gives a various array of monetary providers to its greater than 23 million clients. The firm employs greater than 150,000 folks at its over 6,000 places nationwide. Wells Fargo has about $500 billion in property.

While the corporate continues to derive greater than half its revenues from curiosity earnings (about $26 billion), its actions are usually not restricted to accumulating deposits and lending cash. Wells Fargo engages in different companies akin to brokerage providers, asset administration, and funding banking. The firm additionally makes enterprise capital investments.

Over the final ten years, Wells Fargo has averaged a 1.57% return on property and an 18.19% return on fairness.


Wells Fargo is carefully related to California within the minds of most buyers. The firm now operates in 23 totally different states. However, the focus in California stays.

Mortgage lending in California accounts for about 14% of Wells Fargo’s whole mortgage portfolio. Commercial actual property loans in California account for one more 5% of the corporate’s whole loans. No different single state accounts for a equally sized portion of whole loans. In truth, neither mortgage lending nor business actual property lending in some other state accounts for greater than 2% of Wells Fargo’s whole loans.


Wells Fargo’s give attention to cross-selling is well-known. The firm has a acknowledged aim of doubling the quantity of merchandise the common shopper and enterprise buyer has with Wells Fargo to eight merchandise per buyer (from the present 4 merchandise per buyer).

Cross-selling will increase buyer stickiness. It additionally helps enhance profitability by lowering bills relative to revenues. The want for a big bodily footprint is decreased – as is the necessity for a big quantity of bankers. Instead, the prevailing infrastructure is ready to present further income from the identical clients.

Wells Fargo’s Chairman & CEO, Richard Kovacevich, explains the significance of the corporate’s cross-selling within the “Vision & Values” part of the company web site:

Cross-selling — or what we name “needs-based” promoting — is our most essential technique. Why? Because it’s an “increasing returns” enterprise mannequin. It’s just like the “network effect” of e-commerce. It multiplies alternatives geometrically. The extra you promote clients the extra about them. The extra about them the better it’s to promote them extra merchandise. The extra merchandise clients have with you the higher worth they obtain and the extra loyal they’re. The longer they stick with you the extra alternatives it’s a must to meet much more of their monetary wants. The extra you promote them the upper the revenue as a result of the added value of promoting one other product to an present buyer is commonly solely about ten p.c of the price of promoting that very same product to a brand new buyer. This offers us–as an aggregator — a big value benefit over one product or one channel firms. Cross-selling re-invents how monetary providers are aggregated and offered to clients — identical to different aggregators akin to Wal-Mart (normal merchandise), Home Depot (dwelling enchancment merchandise) and Staples (workplace provides).

Mr. Kovacevich’s enthusiasm for the cross-selling mannequin is nicely justified. It is troublesome to quantify the significance of assembly all the numerous wants of your clients, as a result of you can’t measure the alternatives you missed. However, it’s apparent that decreasing every buyer’s curiosity in contemplating a competitor’s providers will drastically enhance long-term profitability for any firm engaged in any line of enterprise – not only for a financial institution.

Later, in the identical web site part, Mr. Kovacevich addresses the significance of buyer stickiness:

(Cross-selling) is our most essential customer-related gross sales metric. We wish to earn 100% of our clients’ enterprise. The extra merchandise clients have with Wells Fargo the higher deal they get, the extra loyal they’re, and the longer they stick with the corporate, bettering retention. Eighty p.c of our income development comes from promoting extra merchandise to present clients.

This give attention to retention is a vital half of a long-term plan to keep up Wells Fargo’s above-average returns on property and fairness. Extraordinary profitability comes from differentiating your services or products from these of your opponents. Increasing buyer stickiness and decreasing “comparison shopping” is a key half of sustaining extraordinary profitability.

Some companies are blessed with enviable economics as a result of of their product’s pure prominence within the minds of their clients. Most companies are obsessive about market share. But, what number of actually take into consideration “mind share”? Obviously, a product like Coke (KO), Hershey (HSY), or Snickers goes to have a constructive affiliation within the minds of customers.

For many individuals, these merchandise may also have a distinguished place in every buyer’s thoughts (relative to different services on which cash could be spent). A number of different companies have a wholesome thoughts share with out the constructive affiliation; GEICO is the obvious instance. The firm’s model conjures up nothing however the phrases “auto insurance”. Of course, that is all of the GEICO model has to do.

So, what does all this must do with Wells Fargo? Mind share is not simply the consequence of publicity to promoting. In truth, generally, publicity to promoting cannot duplicate the type of outcomes {that a} direct, differentiated expertise creates. Entertainment properties are by far the leaders in thoughts share. People who noticed and beloved Star Wars keep in mind the movie. In truth, they do not simply keep in mind the movie, they really file it away (or, extra exactly, cross reference it) in numerous methods inside their thoughts.

The proof for this specific instance is ample. There are numerous references to Star Wars in different media. The identify, the music, the opening textual content and numerous different parts are instantly recognizable. Even the movies Star Wars followers hated made extra money than virtually some other motion pictures within the historical past of cinema – and this was a long time after the unique got here out. So, clearly Star Wars has the type of lasting thoughts share any enterprise ought to aspire to if it hopes to constantly earn extraordinary earnings.

Unfortunately, most companies, nevertheless nicely run, cannot attain this type of thoughts share. The services they supply can by no means be as differentiated and memorable as a movement image. Just as importantly, the constructive associations is not going to be current, just because the services or products will not be inherently thrilling, entertaining, or nice. This is clearly the case in monetary providers.

So, what can a monetary providers firm do to enhance its thoughts share? The most blatant tactic is solely to “wow” its clients. In truth, Wells Fargo’s CEO discusses this specific possibility within the “Vision and Values” part of the corporate’s web site:

We must “wow!” them. We know what that appears like as a result of we’re all clients. We go to the cleaners, the grocery retailer, a restaurant or no matter, and we discover a scenario the place we’re “wowed!” We stroll out and we are saying, these folks actually listened to me and helped me get what I would like. All of us hear tales about clients, say, who choose a sure line on the grocery store as a result of they know the one who baggage the groceries connects with clients — smiles, greets common clients by identify, asks how their households are doing. When a private banker helps a buyer in a single of our shops, or when a buyer will get assist from one of our cellphone bankers or does transactions on we wish them to say, “That was great. I can’t wait to tell someone.”

Another possibility value pursuing is widening the associations current within the buyer’s thoughts. Financial providers is a enterprise the place associations are usually extra acutely aware, categorized, and hierarchical than the associations fashioned in additional closely branded companies. Put merely, the (potential) buyer normally thinks of a “set” earlier than considering of an “element” inside that set. Like many psychological associations, the data could be returned in both course. For instance, the client could usually suppose “banks” after which suppose “Wells Fargo”, however may also be capable to return the phrase “bank” if prompted by the identify “Wells Fargo”. This categorization is essential, as a result of it supplies (restricted) permission for Wells Fargo to broaden its thoughts share horizontally (throughout service classes).

In different phrases, offering a various vary of monetary providers does not simply make sense from the supplier’s perspective, it additionally is sensible from the person’s perspective, as a result of the person of monetary providers has already grouped deposits, borrowing, bank cards, insurance coverage, brokerage providers, asset administration, and so on. collectively in a really unfastened approach inside his thoughts. As a consequence of this psychological community, one constructive expertise with Wells Fargo will drastically have an effect on a buyer’s want to pay for a further service, even when the 2 providers are usually not actually all that related.

The three key parts listed here are: a broader definition of what Wells Fargo is (a spot that does “money things”, not only a financial institution), a constructive expertise, and a few sense of belief that the standard of service will likely be constant. The final requirement is the simplest to satisfy, as a result of it is pure for a buyer to imagine that the constructive expertise was not a fluke, a lot the best way a diner assumes the great meal he had at a selected restaurant was not brought on by his selecting the very best providing from the menu. The diner normally assumes the general high quality of the restaurant’s varied entrees is superior. Likewise, a superb expertise with one of Wells Fargo’s services or products will doubtless rub off on its different choices.


Shares of Wells Fargo at the moment yield simply over 3%. The inventory trades at a price-to-book ratio of slightly below 2.75 and a price-to-earnings ratio of lower than 15.


Over the final 5, 10, 15, and 20 years shareholders of Wells Fargo & Company have fared higher than the S&P 500. As of the tip of final yr, WFC’s whole return over the past ten years was 17% vs. 9% for the S&P. Over the final 20 years, WFC outpaced the S&P 500 by an excellent wider margin: 21% vs. 12%.

Wells Fargo has a stellar popularity with buyers. The firm is the one U.S. financial institution to earn Moody’s highest credit standing. Wells Fargo additionally boasts a widely known main shareholder. The largest proprietor of the corporate’s frequent inventory is Berkshire Hathaway. Warren Buffett’s holding firm has a roughly 5.5% stake in Wells Fargo. Berkshire’s final reported buy occurred throughout the first quarter of this yr.

Wells Fargo has a acknowledged aim of attaining double-digit development in earnings and income whereas managing a return on property over 1.75% and a return on fairness over 20%. Those are each very bold targets. The firm has achieved some of the best returns on property and fairness of any main U.S. financial institution. However, Wells Fargo will most likely want to extend the proportion of income it derives from price companies whether it is to realize these targets.

In the years forward, the corporate could nicely develop into extra of a diversified monetary providers enterprise. In truth, that is what I count on will occur. The firm’s dedication to cross-selling will not be some fad. Eventually, this dedication will change the best way buyers take into consideration Wells Fargo. Soon, it might be thought-about rather more than a financial institution.

Wells Fargo’s CEO makes the case that his firm’s P/E is just too low. Wells Fargo has a stable historical past of robust development and profitability. So, why ought to it’s valued equally to most different banks? Shouldn’t it’s awarded a a number of extra according to a development firm?

There’s truly some benefit to this argument. Wells Fargo is unusually nicely positioned for a financial institution. Often, these banks that appear sure to earn very excessive returns on property and fairness for a few years to return are poorly positioned for future development. These banks are sometimes smaller than their opponents and centered on a selected geographic area of interest. Any acquisitions would dilute the distinctive profitability of the financial institution’s area of interest.

Of course, there are additionally many consolidators within the banking trade. Unfortunately, many of these banks would not have a historical past of incomes the type of returns on property and fairness that Wells Fargo has achieved. Even extra importantly, there’s little differentiation between these titans of the banking trade and their nationwide opponents. Therefore, their moats are extremely suspect.

Wells Fargo is a distinct sort of financial institution. It has a historical past of extraordinary development and profitability. There are two apparent alternatives for future development: geographic enlargement and cross-selling. Of these two alternatives, it is clear I’m extra enamored with the latter. An eastward push will not be crucial, and definitely not by way of an ill-advised acquisition.

There is so much of worth within the Wells Fargo franchise and there’s lots of room inside that franchise for future development. That’s one of the nice benefits of the monetary providers trade. With the proper mannequin, limits to development are virtually non-existent. In different highly-profitable industries, there’s usually nowhere to reinvest new capital at the same fee of return.

If Wells Fargo is a development inventory, it’s a peculiar kind of development inventory. Maybe that’s what attracted Buffett to the corporate within the first place. Here is a enterprise with a robust franchise that may develop for a few years to return. Perhaps most significantly, it’s a development enterprise that regularly trades available in the market at worth like multiples, just because it is a financial institution.

At the present market worth, Wells Fargo is the type of funding you make as soon as and neglect. The valuation will not be so low cost as to vow a superb return if the enterprise falters. But, the enterprise will not be so suspect as to require the margin of security be offered by a low P/E ratio. Sometimes, close to sure development is the margin of security.

On a separate subject, I’d prefer to encourage anybody with an curiosity in aggressive benefits to learn your entire “Vision and Values” part of the Wells Fargo website.

Superficially, it seems to be like some other on-line presentation to buyers. In reality, it’s nothing like these hole, sugary slide reveals. It’s truly an interesting exploration of aggressive benefits inside an trade that appears completely not like the type of branded, consumer-oriented companies one usually associates with robust franchises. Even when you aren’t within the banking trade specifically, I like to recommend studying this part for its insights into buyer psychology and habits.

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