Brian2: I wouldn’t be quick to compare Wells (or any bank’s) results to those of other banks over the past, say, five or six years. A lot of banks had inflated, never-to-be-seen-again revenue streams on mispriced or non-existant assets. Banking ratios are out the window. Instead, you should look through to the business’ operations. Without the Wachovia acquisition, Wells operated a lot like the Wal-Mart of banks – undercutting competitors and grabbing market share by leaps and bounds. With Wachovia, it is now cross selling customers, essentially creating “super centers” where it previously had free-standing stores.

If you look back to the early 2000s and earlier, few banks (if any) had profit margins as fat as those of Wells Fargo.

A sizable chunk of USB’s business model is payments (transaction fees) which doesn’t require assets. That is presumably what pushes up it’s ROA. USB is very well managed and the CEO is great but I have slight reservations regarding their payments business which is a commodity type business. I am not sure how sustainable it is in the long run. Also remember Buffetts investment in USB is relatively small at only 2.5% of the portfolio ( http://www.dataroma.com/m... ).

Wells however is a pure vanilla lending business with the best spreads in the industry.

I have another question. Warren Buffettt keeps touting that WFC is the lowest cost producer in terms of its interest paid out on interest-bearing liabilities among all the big banks. Logically, if that is the case, WFC should have a higher ROA than USB. However, historically (in the past decade), USB has a higher ROA than WFC.

The way I look at it, though USB pays out a higher interest on its liabilities, but it has a better efficiency ratio of about 50% versus WFC of 54%. This difference may have caused USB to higher a higher ROA.

So my question is when WEB touts about low-cost producer, he seems to limit just to interest on the liabilities? Wouldn’t operating expenses be part of being a low-cost producer?

I may have missed it, and moreover it may be of little interest, but have you discussed somewhere the possibility of buying bonds and/or preferred of WFC? Even though the bond prices have recovered nicely along with the common stock, the yields are in some cases appealing, especially considering medium-to-long term bonds. And of course, there is always the likelihood that another panic unfolds in the near term, thus improving yields again.

In particular, I am thinking of some subordinated notes/preferred stock with floating rates (say LIBOR 3M 0.5/1%), and which quote at around 60 or 70 cents the dollar. Agreed, the yield is not that great now, but being indexed it is somehow inflation protected, and moreover you have capital gains. And, being senior to the common stock –which is safe in your analysis–, there is little probability of loss.

I am particularly interested, as always, not only in your answer, but in the thought process that would lead you to it.

simon: No worries on the capital raise – it’s not highly dilutive (though I don’t agree with Uncle Sam that WFC needs it). Citi got all of their money upfront when they were highly toxic. Clearly the massive derisking at the end of last year helped Wells clean up a lot of Wachovia’s toxic mortgage garbage. On a level playing field where nobody received TARP funds, we’d probably see much bigger capital raises today from Citi or BofA than we would see from US Bank or WFC.

Not sure if there’s any update on the queries I mentioned. WFC and banks in general have surged went up from the time I raised those questions which are still lingering.

I am still optimistic on WFC future and its prosperity given the culture and management that is leading. But just to be sure, I would like to know the risk of its off-balance sheet arrangement.

Thanks

I will write a post up on it. There is some more explaining that goes into this investment, such as analyzing the loan portfolio and the Level 3 “assets.”

More to come for sure — sorry for the delay.

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