Author Topic: WFC - Wells Fargo  (Read 382059 times)

Jurgis

  • Hero Member
  • *****
  • Posts: 4621
    • Porfolio
Re: WFC - Wells Fargo
« Reply #1010 on: June 27, 2019, 10:25:21 PM »
I have an idea: some online lender should make a loan for someone to buy Kanodia's house. Everyone would be happy: Bank of Internet would be saved, Kanodia would have sold his house, online lender would have made a yuge loan showing a yuge growth for its shareholders and buyer would have a 180mln dollar house. Talk about win-win-win-win.
"Before you can be rich, you must be poor." - Nef Anyo
--------------------------------------------------------------------
"American History X", "Milk", "The Insider", "Dirty Money", "LBJ"


RuleNumberOne

  • Sr. Member
  • ****
  • Posts: 308
Re: WFC - Wells Fargo
« Reply #1011 on: June 27, 2019, 11:54:44 PM »
And then they should IPO to raise capital at 50x revenue. "Cloud banking IPO."

I have an idea: some online lender should make a loan for someone to buy Kanodia's house. Everyone would be happy: Bank of Internet would be saved, Kanodia would have sold his house, online lender would have made a yuge loan showing a yuge growth for its shareholders and buyer would have a 180mln dollar house. Talk about win-win-win-win.

kab60

  • Hero Member
  • *****
  • Posts: 1005
Re: WFC - Wells Fargo
« Reply #1012 on: June 28, 2019, 02:10:40 AM »
I don't have a strong view as to where interest rates will go, but if one expects the US to follow Europe, banks are gonna be much "cheaper" on a price/book basis (since they're much worse businesses). Europe is swimming in banks that have a hard time to earn a double digit return on equity and thus trades at a sizeable discount to book value since NIM is getting compressed by negative rates. What happens if rates turn negative in the US?

Dalal.Holdings

  • Sr. Member
  • ****
  • Posts: 308
Re: WFC - Wells Fargo
« Reply #1013 on: June 28, 2019, 06:34:56 AM »
WFC's moat is forever (which is why Buffett owns it.) The fundamental banking principle has not changed: issue IOUs and buy assets with the money. Lot of regulations get in the way, because once in 20 years, there is a big blowup and regulations need to be increased again and again.

The S&L crisis was caused by banks hiking deposit rates to attract deposits, reaching for higher yield and losing money in the end.

The 2008 crisis: issue commercial paper, trade mortgages, mortgage derivatives, derivatives of derivatives, ... When the commercial paper stopped (because the players reached for yield and assets went bad) - Lehman, Bear, GE went broke. Companies like AXP switched to online CDs but have not gained traction in the 11 years since.

2018: Robinhood floated a 3% checking account and got shut down.

2019: JPM is back to trading mortgages. According to BofA CEO, BofA looks every borrower in the eye, whereas JPM buys loans in the "wholesale" market.

GS wants to replace commercial paper with high interest CDs. They probably want to buy mortgages whole sale like in 2008.

Thank you for posting some unusually valuable insights...really unusual to see on this board.

It shouldn't be too hard to fathom what will happen to these "online only" banks that are basically paying their depositors more than the 2 year U.S. treasury yield to hold their deposits at their banks and meanwhile, the long end of the yield curve is flat and even inverted...

The "online only" banks also have no moats vs. each other. Depositors can easily move money from Marcus to Ally to Discover Savings (or whatever new bank is providing higher rates). When rates move higher, one can just start a new bank that providers superior rates, steal customers from these online banks and wipe out their depositor base in one fell swoop.

Lol on the "Head of Marcus" saying that traditional banking is doomed. You know what Munger says about a man-with-hammer syndrome...

sleepydragon

  • Hero Member
  • *****
  • Posts: 674
Re: WFC - Wells Fargo
« Reply #1014 on: June 28, 2019, 07:03:26 AM »
WFC's moat is forever (which is why Buffett owns it.) The fundamental banking principle has not changed: issue IOUs and buy assets with the money. Lot of regulations get in the way, because once in 20 years, there is a big blowup and regulations need to be increased again and again.

The S&L crisis was caused by banks hiking deposit rates to attract deposits, reaching for higher yield and losing money in the end.

The 2008 crisis: issue commercial paper, trade mortgages, mortgage derivatives, derivatives of derivatives, ... When the commercial paper stopped (because the players reached for yield and assets went bad) - Lehman, Bear, GE went broke. Companies like AXP switched to online CDs but have not gained traction in the 11 years since.

2018: Robinhood floated a 3% checking account and got shut down.

2019: JPM is back to trading mortgages. According to BofA CEO, BofA looks every borrower in the eye, whereas JPM buys loans in the "wholesale" market.

GS wants to replace commercial paper with high interest CDs. They probably want to buy mortgages whole sale like in 2008.

Thank you for posting some unusually valuable insights...really unusual to see on this board.

It shouldn't be too hard to fathom what will happen to these "online only" banks that are basically paying their depositors more than the 2 year U.S. treasury yield to hold their deposits at their banks and meanwhile, the long end of the yield curve is flat and even inverted...

The "online only" banks also have no moats vs. each other. Depositors can easily move money from Marcus to Ally to Discover Savings (or whatever new bank is providing higher rates). When rates move higher, one can just start a new bank that providers superior rates, steal customers from these online banks and wipe out their depositor base in one fell swoop.

Lol on the "Head of Marcus" saying that traditional banking is doomed. You know what Munger says about a man-with-hammer syndrome...

Many years ago I got a letter from GS asking me to close my brokerage account with them because my account had less than 1 million. Now I got emails and ads asking me to open an account at Marcus. No, thanks.

coc

  • Full Member
  • ***
  • Posts: 204
Re: WFC - Wells Fargo
« Reply #1015 on: June 28, 2019, 08:14:28 AM »
Another thing not being discussed is how banks like WFC "tie" your accounts together.

For example, with a jumbo mortgage, I believe WFC reduces mortgage costs 1/8th or 1/4 point for every 250K you have in an account with them. Someone sticking a million bucks at WFC may save themselves 1%/yr or $10,000 on a million dollar mortgage. That would save you $200,000 over the life of a 30 yr mortgage.

From there, Wells can make you a deal on brokerage, get your business a loan, help you buy an apartment building, etc. etc.

A. That is hard to replicate
B. It creates sticky money - most people just aren't looking around to change their bank

For those trying to make the obvious point that branches cost money, my question to you (rhetorically) is - why didn't branchless banking disrupt the big lenders years ago? There's no magic to the Internet - and even that has been around for 25 years in usable form with no dent made on traditional banking.

Branchless banking is not a new concept, and didn't arrive with the internet, even if the UI of the Internet makes certain things easier. There's a reason JPM, for example, has been opening branches in certain markets. Dimon isn't stupid.

cameronfen

  • Hero Member
  • *****
  • Posts: 597
Re: WFC - Wells Fargo
« Reply #1016 on: June 28, 2019, 08:28:14 AM »
WFC's moat is forever (which is why Buffett owns it.) The fundamental banking principle has not changed: issue IOUs and buy assets with the money. Lot of regulations get in the way, because once in 20 years, there is a big blowup and regulations need to be increased again and again.

The S&L crisis was caused by banks hiking deposit rates to attract deposits, reaching for higher yield and losing money in the end.

The 2008 crisis: issue commercial paper, trade mortgages, mortgage derivatives, derivatives of derivatives, ... When the commercial paper stopped (because the players reached for yield and assets went bad) - Lehman, Bear, GE went broke. Companies like AXP switched to online CDs but have not gained traction in the 11 years since.

2018: Robinhood floated a 3% checking account and got shut down.

2019: JPM is back to trading mortgages. According to BofA CEO, BofA looks every borrower in the eye, whereas JPM buys loans in the "wholesale" market.

GS wants to replace commercial paper with high interest CDs. They probably want to buy mortgages whole sale like in 2008.

Thank you for posting some unusually valuable insights...really unusual to see on this board.

It shouldn't be too hard to fathom what will happen to these "online only" banks that are basically paying their depositors more than the 2 year U.S. treasury yield to hold their deposits at their banks and meanwhile, the long end of the yield curve is flat and even inverted...

The "online only" banks also have no moats vs. each other. Depositors can easily move money from Marcus to Ally to Discover Savings (or whatever new bank is providing higher rates). When rates move higher, one can just start a new bank that providers superior rates, steal customers from these online banks and wipe out their depositor base in one fell swoop.

Lol on the "Head of Marcus" saying that traditional banking is doomed. You know what Munger says about a man-with-hammer syndrome...
Of course im getting slaughtered here, but i dont understand why. 

1. So of course online banks have no moats versus each other but the whole point is that they have a huge advantage versus traditional banks which allows them to take share.  Branchless banks don't need to take share from each other, they can take share from incumbent banks which have most of the business anyway. 

2.  My point with axos has nothing to do with loan losses or risk on that end, it was to point out that Axos has a higher net profit margin than the incumbent banks due to there deposit gathering ability.  NIM is lower for Axos and the asset quality is worse.  I'll give you that.  But my point was even if almost go long commerical paper you can be profitable with a branchless bank as in the case with schwab.  Axos has just choosen to write more risky loans, but thats a knob that axos choose that has nothing to do with its cost strucure.  For example even if axos earned 4.79% on loan which is what wfc earned (compared to 5.66%), it would have a net profit margin of 33% something wfc could never touch.  If you still dont like the fact that Axos has lower asset quality, pick any of the myriad other fintech and branchless institutions doing this.  ADS and sychrony are sort of incumbents with this ability, Marcus is another, tinkoff on Russia is a forth, there are plenty of other branchless banks a quote google search could find.  Some of them are going to have comperable asset quality as WFC as loan quality is just a knob a bank turns.  Those that do, will still have a lower cost structure than WFC making them no riskier than wfc but much more profitable and able to take share. 

3.  Nothing will happen to them even if they pay more than 2% on there deposits and CDs.  Why? because they have little opex.  NIM is the wrong metric to use because it doesn't include opex which branch banks have a lot of and branchless banks do not.  As the thought expirement with Axos showed, you can have much lower net interest margin and still much higher profitability because you don't have to operate any branches. 

cameronfen

  • Hero Member
  • *****
  • Posts: 597
Re: WFC - Wells Fargo
« Reply #1017 on: June 28, 2019, 08:45:48 AM »
Another thing not being discussed is how banks like WFC "tie" your accounts together.

For example, with a jumbo mortgage, I believe WFC reduces mortgage costs 1/8th or 1/4 point for every 250K you have in an account with them. Someone sticking a million bucks at WFC may save themselves 1%/yr or $10,000 on a million dollar mortgage. That would save you $200,000 over the life of a 30 yr mortgage.

From there, Wells can make you a deal on brokerage, get your business a loan, help you buy an apartment building, etc. etc.

A. That is hard to replicate
B. It creates sticky money - most people just aren't looking around to change their bank

For those trying to make the obvious point that branches cost money, my question to you (rhetorically) is - why didn't branchless banking disrupt the big lenders years ago? There's no magic to the Internet - and even that has been around for 25 years in usable form with no dent made on traditional banking.

Branchless banking is not a new concept, and didn't arrive with the internet, even if the UI of the Internet makes certain things easier. There's a reason JPM, for example, has been opening branches in certain markets. Dimon isn't stupid.

I will say this is the most reasonable response imo from the other side.  What other people seem not to understand is you literally can't argue about cost structure.  But I will respond:

1.  Tieing deals together can be done by anyone.  I think WFC and WB like to talk about this, but just from gut instinct i can't believe it moves the needle (for example do you really think tying deals is even resposible for 500m in earnings?).  At least it doesn't pass the smell test for me. 

2.  Internet banks have been around for a while and they have taken share from traditional banks:  Banking is not a business where fast growth is good.  You need to maintain asset quality so you can only grow at a very slow rate.  Also people are sticky for banks.  It's not so easy peeling away customers but people are slowly leaving as branchless banking becomes the obviously better choice for consumers.  That being said branchless banks are a thing and the cats out of the bag.  They have a cost structure advantage and will continue to do so for now until eternity, slowly taking share.  also most branchless banks were no name firms that people didn't trust.  With bigger names getting in taking share will accelerate. 

3.  As regards to Dimon opening up branches, I could say the same thing about GS opening up Marcus.  The GS management team is arguebly better than the JPM one and they decide to go with the strategy.  I think the real answer is like someone said "someone with a hammer..." GS has no branches and JPM does.  They see different nails and have different hammers.   

edit: I'd like to add the assault on deposits is only one dimension of the disruption big banks are facing.  You have more effective competitors on the wealth management side. You have emerging competition on the loan issuance side, credit cards....  Banks are risking distruption not just from branchless banks but basically from the vast majority of the fintech space against virtually every aspect of their business (except maybe IB). 
« Last Edit: June 28, 2019, 08:51:37 AM by cameronfen »

CorpRaider

  • Hero Member
  • *****
  • Posts: 2203
    • The Corpraider
Re: WFC - Wells Fargo
« Reply #1018 on: June 28, 2019, 09:06:35 AM »
I would never have significant assets, say more than like $10K, with a financial institution that did not have a physical presence that was reasonably convenient for me.   

Schwab has a physical location which they refer to as a "branch" right down the street.  So does Fido. 

The big banks are putting together another new potential moat in their new payment system Zelle.  Reminds me a little of when they put together MasterCard.
« Last Edit: June 28, 2019, 09:16:15 AM by CorpRaider »

RuleNumberOne

  • Sr. Member
  • ****
  • Posts: 308
Re: WFC - Wells Fargo
« Reply #1019 on: June 28, 2019, 09:15:19 AM »
Things to think about:
 - The IOUs a bank can issue is limited by the capital they have.
 - Bank profits are an opinion, whether it is a fact won't be known until the next recession.
 - When a recession occurs, the default rate among the Kanodias is not proportional to the higher interest rate on the loans. It can be 100%.

Example:
- Suppose Axos issues CDs for 3%.
- WFC can offer mortgages for 3.25% if you move money into their brokerage accounts and put 20% down with enough income.
- Axos has to find the Kanodias of the world, because normal mortgages where the payments are 45% of income are taken up by BAC and WFC.
- Axos has to compete with GS and everyone else in offering better terms to Kanodia. Even if Kanodia is paying 3% more on his mortgage now, he is guaranteed to walk away as soon as the next recession appears.

I asked WFC for a construction loan in the past for an investment. They said they don't make such loans (even if you buy the land with cash yourself.) LTV doesn't matter - they won't make even a 30% LTV for a construction project.