Author Topic: WFC - Wells Fargo  (Read 300781 times)

HalfMeasure

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Re: WFC - Wells Fargo
« Reply #930 on: May 16, 2019, 06:32:54 AM »
What is everyone assuming on asset cap timing out of curiosity?

The Fed has said over and over the cap will be lifted after WFC comes up with a plan, enacts those plans, and proves they are working. That sounds like years. I think folks underestimate the damage that can be done to a banking entity in that time. The pressure to make bad decisions will increase.

There's rate risk, leverage loan risk, inflation risk, ect during that period. Zero asset growth is generally a mid-single digit ROE destiny for a bank.

I get everyone has multi-decade horizons but realistically I'd rather buy post-asset cap (and 10% spike). WFC may not be the old WFC on the other side.

The idea that WFC can expand internationally post-asset cap is really odd. That's new territory for them, thus high risk.

I would say there are also potential positives to having a cap, especially if the economy is in the late innings. WFC is structurally unable to reach in an attempt to grow their book, and in fact might actually take the opportunity to prune their book and focus on quality of assets vs. quantity. How does capping assets necessarily lower ROE prospects? In my opinion, that only happens if excess capital builds on the balance sheet, but if excess capital can be returned then the ROE should be fine.


Schwab711

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Re: WFC - Wells Fargo
« Reply #931 on: May 16, 2019, 06:36:12 AM »
Without asset growth, commercial relationships are in decline. Normal relationships grow at ~GDP growth. With the cap, WFC will need to cull at roughly that rate. Commercial relationships represent non-interest bearing assets. So you have an additional squeeze on NIM.

Everything bad looks far off at this point in the cycle. There will be bad years at some point. A full cycle, single digit return for a hypothetical, asset-capped bank with excellent scale is quite reasonable. Maybe the word mid was misleading.

Asset growth is the life blood of the bank. Without it, bank returns are akin to bond coupons instead of providing the fuel to a compounding machine! I'm not saying WFC is uninvestable or anything similar. I just haven't seen a single WFC investment pitch that incorporates the ST and LT effects of the asset cap. Nearly every pitch assumes asset cap disappears (sometimes assumed to be instantly) and everything returns to normal. Everything may go back to normal, but it seems less likely by the day.

Schwab711

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Re: WFC - Wells Fargo
« Reply #932 on: May 16, 2019, 06:38:39 AM »
What is everyone assuming on asset cap timing out of curiosity?

The Fed has said over and over the cap will be lifted after WFC comes up with a plan, enacts those plans, and proves they are working. That sounds like years. I think folks underestimate the damage that can be done to a banking entity in that time. The pressure to make bad decisions will increase.

There's rate risk, leverage loan risk, inflation risk, ect during that period. Zero asset growth is generally a mid-single digit ROE destiny for a bank.

I get everyone has multi-decade horizons but realistically I'd rather buy post-asset cap (and 10% spike). WFC may not be the old WFC on the other side.

The idea that WFC can expand internationally post-asset cap is really odd. That's new territory for them, thus high risk.

I would say there are also potential positives to having a cap, especially if the economy is in the late innings. WFC is structurally unable to reach in an attempt to grow their book, and in fact might actually take the opportunity to prune their book and focus on quality of assets vs. quantity. How does capping assets necessarily lower ROE prospects? In my opinion, that only happens if excess capital builds on the balance sheet, but if excess capital can be returned then the ROE should be fine.

If you look back to posts around when the cap was announced, that was my original position too. The issue is, WFC hasn't doing those things. That's what led me to change course in thinking.

All else equal: ROA declines with an asset cap because expenses increase and interest income remains flat (assuming no change in yields to compensate). If leverage is stable, ROE decline due to ROA decline.

HalfMeasure

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Re: WFC - Wells Fargo
« Reply #933 on: May 16, 2019, 09:31:20 AM »
What is everyone assuming on asset cap timing out of curiosity?

The Fed has said over and over the cap will be lifted after WFC comes up with a plan, enacts those plans, and proves they are working. That sounds like years. I think folks underestimate the damage that can be done to a banking entity in that time. The pressure to make bad decisions will increase.

There's rate risk, leverage loan risk, inflation risk, ect during that period. Zero asset growth is generally a mid-single digit ROE destiny for a bank.

I get everyone has multi-decade horizons but realistically I'd rather buy post-asset cap (and 10% spike). WFC may not be the old WFC on the other side.

The idea that WFC can expand internationally post-asset cap is really odd. That's new territory for them, thus high risk.

I would say there are also potential positives to having a cap, especially if the economy is in the late innings. WFC is structurally unable to reach in an attempt to grow their book, and in fact might actually take the opportunity to prune their book and focus on quality of assets vs. quantity. How does capping assets necessarily lower ROE prospects? In my opinion, that only happens if excess capital builds on the balance sheet, but if excess capital can be returned then the ROE should be fine.

If you look back to posts around when the cap was announced, that was my original position too. The issue is, WFC hasn't doing those things. That's what led me to change course in thinking.

All else equal: ROA declines with an asset cap because expenses increase and interest income remains flat (assuming no change in yields to compensate). If leverage is stable, ROE decline due to ROA decline.

Fair. What signs suggest to you that WFC isn't doing these things? I'm curious for this year's CCAR on the excess capital side of things.

Rasputin

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Re: WFC - Wells Fargo
« Reply #934 on: May 16, 2019, 09:54:47 AM »
Focus on personnel count.  I think by 2030 it's likely to be well below 200k.  BAC went from 282k fte dec 31 2010 to 205k dec 31 2018.

We can't see WFC's true earnings power today, and probably not until 2023 or beyond, just like we couldn't see it with BAC's circa 2011 through 2016.  All these issues not only add bazillion costs, they disrupt day to day business.  The fact that the numbers WFC produced so far, tell me their clients are sticky.

I for one like the fact that they can buy back more shares at lower prices.


coc

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Re: WFC - Wells Fargo
« Reply #935 on: May 16, 2019, 11:43:18 AM »
If you truly believe WFC has an impaired franchise long term, you are definitely right to avoid the stock. But I donít agree that this is the case. Think of the extreme culling B of A went through - and their franchise is growing again. That was a much worse problem, and it was addressed. It took a while, but so what? WFC is reducing its expense base carefully while buying back stock at a 10%+ yield - if it takes another few years, thatís not the end of the world. You happen to think they will come out of it poorly on the other side ó youíre entitled to that, and if youíre right, itíll be a mediocre investment. A lot can happen in banking. Another rough period would again shake out some aggressive competitors and allow WFC to pick up new customers again when they are able.
« Last Edit: May 16, 2019, 11:48:45 AM by coc »

eatliftinvestgolf

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Re: WFC - Wells Fargo
« Reply #936 on: May 16, 2019, 12:04:07 PM »
What is everyone assuming on asset cap timing out of curiosity?

The Fed has said over and over the cap will be lifted after WFC comes up with a plan, enacts those plans, and proves they are working. That sounds like years. I think folks underestimate the damage that can be done to a banking entity in that time. The pressure to make bad decisions will increase.

There's rate risk, leverage loan risk, inflation risk, ect during that period. Zero asset growth is generally a mid-single digit ROE destiny for a bank.

I get everyone has multi-decade horizons but realistically I'd rather buy post-asset cap (and 10% spike). WFC may not be the old WFC on the other side.

The idea that WFC can expand internationally post-asset cap is really odd. That's new territory for them, thus high risk.

I would say there are also potential positives to having a cap, especially if the economy is in the late innings. WFC is structurally unable to reach in an attempt to grow their book, and in fact might actually take the opportunity to prune their book and focus on quality of assets vs. quantity. How does capping assets necessarily lower ROE prospects? In my opinion, that only happens if excess capital builds on the balance sheet, but if excess capital can be returned then the ROE should be fine.

If you look back to posts around when the cap was announced, that was my original position too. The issue is, WFC hasn't doing those things. That's what led me to change course in thinking.

All else equal: ROA declines with an asset cap because expenses increase and interest income remains flat (assuming no change in yields to compensate). If leverage is stable, ROE decline due to ROA decline.

Fair. What signs suggest to you that WFC isn't doing these things? I'm curious for this year's CCAR on the excess capital side of things.

There are a number of small signs they are doing these things.  Junior mortgage (pick-a-pay) loan book sales, for instance. They also did a good job avoiding some of the excesses in auto lending recently.

sleepydragon

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Re: WFC - Wells Fargo
« Reply #937 on: May 16, 2019, 12:52:10 PM »
What is everyone assuming on asset cap timing out of curiosity?

The Fed has said over and over the cap will be lifted after WFC comes up with a plan, enacts those plans, and proves they are working. That sounds like years. I think folks underestimate the damage that can be done to a banking entity in that time. The pressure to make bad decisions will increase.

There's rate risk, leverage loan risk, inflation risk, ect during that period. Zero asset growth is generally a mid-single digit ROE destiny for a bank.

I get everyone has multi-decade horizons but realistically I'd rather buy post-asset cap (and 10% spike). WFC may not be the old WFC on the other side.

The idea that WFC can expand internationally post-asset cap is really odd. That's new territory for them, thus high risk.

I would say there are also potential positives to having a cap, especially if the economy is in the late innings. WFC is structurally unable to reach in an attempt to grow their book, and in fact might actually take the opportunity to prune their book and focus on quality of assets vs. quantity. How does capping assets necessarily lower ROE prospects? In my opinion, that only happens if excess capital builds on the balance sheet, but if excess capital can be returned then the ROE should be fine.

If you look back to posts around when the cap was announced, that was my original position too. The issue is, WFC hasn't doing those things. That's what led me to change course in thinking.

All else equal: ROA declines with an asset cap because expenses increase and interest income remains flat (assuming no change in yields to compensate). If leverage is stable, ROE decline due to ROA decline.

Fair. What signs suggest to you that WFC isn't doing these things? I'm curious for this year's CCAR on the excess capital side of things.

There are a number of small signs they are doing these things.  Junior mortgage (pick-a-pay) loan book sales, for instance. They also did a good job avoiding some of the excesses in auto lending recently.

On my way between work and home, I saw them recently closed a branch. That branch is at a awkward locations and not much traffics.

Spekulatius

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Re: WFC - Wells Fargo
« Reply #938 on: May 16, 2019, 01:29:10 PM »
If you truly believe WFC has an impaired franchise long term, you are definitely right to avoid the stock. But I donít agree that this is the case. Think of the extreme culling B of A went through - and their franchise is growing again. That was a much worse problem, and it was addressed. It took a while, but so what? WFC is reducing its expense base carefully while buying back stock at a 10%+ yield - if it takes another few years, thatís not the end of the world. You happen to think they will come out of it poorly on the other side ó youíre entitled to that, and if youíre right, itíll be a mediocre investment. A lot can happen in banking. Another rough period would again shake out some aggressive competitors and allow WFC to pick up new customers again when they are able.

Agree with above. If they canít grow, so be it. With the share as cheap as it is, if they can pay an almost 4% dividend and buy back 5-6% of their shares year after year- so be it. I prefer this low risk of value creation over pushing too much on growth st this point in the cycle. They still show underwriting discipline, which imo is the most important thing for a bank.
To be a realist, one has to believe in miracles.

RuleNumberOne

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Re: WFC - Wells Fargo
« Reply #939 on: May 17, 2019, 07:42:27 PM »
- Imagine the balance sheet, earnings, dividend, and market cap stay frozen for the next 7 years.
- WFC retires 7% of its market cap every year (~$14 billion in buybacks, ~$8 billion in dividends).
- After 7 years, WFC has retired 60% of its original share count (0.93^7 = 0.6).
- Dividend yield would be 3.9%/0.4 = 9.75% of original share price

If WFC continues to do the same in years 7 - 14, the dividend yield would be 24.375% of original share price (9.75% / 0.4).

Assume 2% inflation over 14 years. 1.02 ^ 14 = 1.32.

24.375%/1.32 = 18.5%.

Wouldn't I get an inflation-adjusted 18.5% yield for retirement if the market cap stays the same?