Wells Fargo & Co.
), up 26.3% year to date, recently passed the
Industrial and Commercial Bank of China Ltd.
(HKG:1398) as the world's largest bank by market capitalization.
Employing a rather traditional banking model, Wells Fargo enjoys
the highly sought-after attention of the Sage from Omaha himself.
Wells Fargo comfortably occupies 22.6% of
(NYSE:BRK.A) investment portfolio; Warren Buffett has been steadily
buying Wells Fargo since the real estate banking crisis of 1990.
With CEO John Stumpf at the helm of its sound management team,
Wells Fargo has enjoyed consistent earnings growth in the past four
years, showing its quality against its peer group.
The bank reported attractive results for Q2 2013. Bottom line grew
19.7% to $5.27 billion from $4.40 billion the previous year. This
translates into $.98 in EPS, topping the $.93 forecasted by
analysts. This marked the 14th consecutive quarter of EPS growth,
which is an achievement few megabanks can claim.
With 40.6% of its loan portfolio in mortgages, Wells Fargo's recent
performance can be attributed to rising home prices. However, this
also means that the bank is highly exposed to current rising
interest rates, which adversely impact the volume of mortgage
originations as homebuyers shy away. Conversely, as the Fed eases
out of its zero interest rate policy, mortgage rates should rise at
a quicker pace, thereby further contributing to Wells Fargo's
profitability in the form of wider net interest margins.
Market IQ's proprietary fundamental metrics give Wells Fargo an
Outperform rating. Market IQ characterizes Wells Fargo as a high
quality but average value stock (see below).
The company's qualitative strengths can be seen in multiple areas,
including EPS growth, return on equity (ROE), and financial
- The company has demonstrated a pattern of positive EPS growth
over the past two years. Most recently for Q2 2013, Wells Fargo
improved EPS by 19.7% when compared to Q2 2012.
- ROE increased to 13.3% in Q2 2013 vs. 11.24% in Q2 2013.
- Wells Fargo has an equity-to-debt ratio of 0.13, which is
higher than the industry average of 0.11, indicating strong
financial strength relative to its peers. Additionally, its
interest coverage ratio of 6.6 is higher than the industry
average of 3.1, indicating the firm's strong ability to meet its
Based on Market IQ's Valuation metrics, Wells Fargo is fairly
priced compared to its peer group (see below).
While three large draft horses power the Wells Fargo stagecoach --
commercial loans, mortgages, and brokerage advisory -- the bank is
making good headway in expanding its wealth management segment, as
well as its credit card and investment banking divisions. The
latter, though still a small proportion of the bank's total
revenues (5%), generated fees in Q2 2013 that were 52% higher than
the previous quarter and 85% higher than the same quarter one year
ago. Since its merger with Wachovia, Wells Fargo has made strong
efforts in expanding its investment banking team globally. With
intentions to continue growing headcount by 10-20% annually, Wells
Fargo Securities is expected to continue climbing the league
tables. Furthermore, Wells Fargo's wealth management division,
currently its fastest growing business segment, is evidently
realizing the synergies of cross-selling to its established
Recently, Wells Fargo announced a deal with
) that would offer customers a brand-new line of credit cards on
the American Express platform. This is a large step toward reaching
the aggressive goal announced by management earlier in the year
regarding doubling its presence in the credit card market. This is
a strong strategic play coming from Wells Fargo, especially given
that credit card delinquency rates are at the lowest they has been
Solidly planted as a US leader in traditional loans, Wells Fargo
has a strong foundation from which to pursue the wealth of
promising growth opportunities up ahead. Having always been
associated with conservatism, the bank abstains from attempts to
garner the fickle attention of the market. Despite shying from the
spotlight, Wells Fargo is the resilient turtle that trudges
onwards, and as the fable suggests, it stays true to the path of
winning in the long run.
This article was written by Adil Yousuf and
and originally appeared on
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