Author Topic: WFC - Wells Fargo  (Read 316569 times)

eatliftinvestgolf

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Re: WFC - Wells Fargo
« Reply #920 on: May 08, 2019, 06:37:05 PM »
https://www.americanbanker.com/news/wells-fargo-creates-unit-to-satisfy-regulatory-demands

Wells Fargo has created an operations unit designed to focus exclusively on meeting demands of regulators who have expressed dissatisfaction with the bank's progress after a series of scandals.

Derek Flowers, the bank's chief credit and market risk officer, will lead the newly formed strategic execution and operations group, acting CEO C. Allen Parker said in an internal memo issued Wednesday. Flowers, a 21-year veteran of Wells Fargo, currently oversees all credit risk throughout the bank's lending activities and provides oversight of all company and line-of-business credit policies.
32% BRK.B, 28% WFC, 16% BUD, 16% alternatives, 8% cash


coc

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Re: WFC - Wells Fargo
« Reply #921 on: May 15, 2019, 12:38:57 PM »
For those struggling with the basic math on WFC's valuation post asset cap, here is a simple way to consider it: If WFC can grow at the aforementioned 4% per annum for a long time ahead (seems a reasonable figure to me), they would need to retain roughly 1/4 of the earnings to do if they can earn 15-16% on tangible equity. That leaves 75% distributable (again, over time, it's higher currently).

What's a company worth that can distribute 75% of their earnings and grow at 4%? If you pick a fair return is 10%, you'd capitalize its distributable free cash flow at 10%-4% = 6%. So if they have $5 of earning power per share, that's $3.75 of distributable cash flow, capitalized at 6% = $62.50/share. If you figure there is some excess capital on top of that, say it's $10 billion or ~$2.50/share, WFC would have a rough intrinsic value of $65.

You can play with the numbers as you see fit, factor in buybacks at current prices etc., but that is a helpful place to start, at least.

Schwab711

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Re: WFC - Wells Fargo
« Reply #922 on: May 15, 2019, 01:43:02 PM »
How does WFC grow 4% without increasing assets? By necessity, it means ROA must increase (and operating expenses must remain flat or ROA must increase fast enough to accommodate increasing operating expenses as well). We know wages are increasing and NIM is decreasing. The longer the asset cap remains the harder it's going to be to grow post-cap removal since relationships are slowly lost to competition.

dutchman

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Re: WFC - Wells Fargo
« Reply #923 on: May 15, 2019, 02:29:41 PM »
in the latest filing buffett sold some.
Is this because of the cap because it doesn't seem
like he's up at the limit.

sleepydragon

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Re: WFC - Wells Fargo
« Reply #924 on: May 15, 2019, 03:58:48 PM »
in the latest filing buffett sold some.
Is this because of the cap because it doesn't seem
like he's up at the limit.

I think he is selling due to cap.
In fact, I think he is forced to buy JPM and BK because he is forced to sell WFC. It seems the dollar notional are very close.

How many stocks out there that Warren likes but he is forced to sell?

sleepydragon

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Re: WFC - Wells Fargo
« Reply #925 on: May 15, 2019, 04:03:54 PM »
For those struggling with the basic math on WFC's valuation post asset cap, here is a simple way to consider it: If WFC can grow at the aforementioned 4% per annum for a long time ahead (seems a reasonable figure to me), they would need to retain roughly 1/4 of the earnings to do if they can earn 15-16% on tangible equity. That leaves 75% distributable (again, over time, it's higher currently).

What's a company worth that can distribute 75% of their earnings and grow at 4%? If you pick a fair return is 10%, you'd capitalize its distributable free cash flow at 10%-4% = 6%. So if they have $5 of earning power per share, that's $3.75 of distributable cash flow, capitalized at 6% = $62.50/share. If you figure there is some excess capital on top of that, say it's $10 billion or ~$2.50/share, WFC would have a rough intrinsic value of $65.

You can play with the numbers as you see fit, factor in buybacks at current prices etc., but that is a helpful place to start, at least.

I think you are right on. Banks are interesting because they can easily reinvest their retained earning at the same rate ó as much as they could subject to regulatory approval. At 15% ROE thatís very very good.
Asset cap will soon be removed. Itís not hard to fix things when the problem has been identified and rules written out.
Ultimately the fate of any banks is determined by its credit decisions on its loans.

eatliftinvestgolf

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Re: WFC - Wells Fargo
« Reply #926 on: May 15, 2019, 05:58:39 PM »
How does WFC grow 4% without increasing assets? By necessity, it means ROA must increase (and operating expenses must remain flat or ROA must increase fast enough to accommodate increasing operating expenses as well). We know wages are increasing and NIM is decreasing. The longer the asset cap remains the harder it's going to be to grow post-cap removal since relationships are slowly lost to competition.

I think coc meant going forward not during the asset cap? During the asset cap, distributable earnings are higher, buybacks are higher, revenue may shrink, and  non interest operating expenses are currently elevated and will start to be ripped out.  In the future, post-asset cap, the 4% growth as a valuation assumption seems reasonable relative to the long term deposit trends in the industry and the ROIC of retaining capital as a scale community banking player. You have to believe that the remaining customers are good customers for the franchise (stickiness and credit quality)to be comfortable that the asset cap wonít be too damaging to per share intrinsic value as the company is not growing right now and per share ownership goes up.
32% BRK.B, 28% WFC, 16% BUD, 16% alternatives, 8% cash

coc

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Re: WFC - Wells Fargo
« Reply #927 on: May 15, 2019, 07:55:31 PM »
How does WFC grow 4% without increasing assets? By necessity, it means ROA must increase (and operating expenses must remain flat or ROA must increase fast enough to accommodate increasing operating expenses as well). We know wages are increasing and NIM is decreasing. The longer the asset cap remains the harder it's going to be to grow post-cap removal since relationships are slowly lost to competition.

Yes, I am talking post asset cap. I do not believe they are losing out to competition in any great sense - though they are letting some business go on purpose. WFC would be able to grow at 4% probably without adding a great deal of new relationships, net, anyways. If your customers stay around, there is natural growth in the relationship over time as the economy grows.

While the cap is in, they are, Iím sure, paring down what they feel are the least attractive relationships. But it would be too simple to say they wonít be able to grow over time if they so choose. There are lines of business theyíre not heavily in, they do nothing internationally, and so on. They can be simultaneously pursuing new relationships and letting go of old.

Schwab711

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Re: WFC - Wells Fargo
« Reply #928 on: May 15, 2019, 08:21:25 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.
« Last Edit: May 15, 2019, 08:35:11 PM by Schwab711 »

eatliftinvestgolf

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Re: WFC - Wells Fargo
« Reply #929 on: May 16, 2019, 05:59:48 AM »
I think Dec 2020 after the election, but I donít share your level of concern.  Why do they need asset growth to earn a 1% ROA?  Mid single digits seems off unless they are not allowed to return capital... which seems unlikely.
32% BRK.B, 28% WFC, 16% BUD, 16% alternatives, 8% cash