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Wells Fargo: Banking’s Bulwark

By Thomas Scarlett on June 18, 2013

Since the stock market plunge of 2008, some investors have been skittish about investing in the banking sector, particularly institutions that do a lot of mortgage business. The mortgage industry will always be associated in the minds of this generation of investors with the worst financial meltdown since the Great Depression.

However, Wells Fargo (NYSE: WFC) has weathered the storm and come out on the other side with a solid position in several markets. The San Francisco-based company is the nation’s largest mortgage lender and is poised to reap handsome rewards as the nation’s housing sector continues its recovery.

Wells Fargo is the best investment choice among the “Big Four” US-based banks, an elite group that also entails Bank of America (NYSE: BAC), Citigroup (NYSE: C) and JPMorgan Chase (NYSE: JPM). Wells Fargo has an extremely consistent earnings track record, even as its industry has gone through a grueling shakeout.

Wells Fargo posted a 22 percent increase in first-quarter 2013 profit in its most recent earnings report, marking the 13th consecutive earnings rise for the company.

The bank reported profits of $5.2 billion, or 92 cents a share, compared with $4.3 billion, or 75 cents a share, in the same period a year earlier. The results outpaced estimates of analysts polled by Thomson Reuters, who had forecast earnings of 88 cents a share. Increased revenue played a part, but so did the company’s recent effort to curb expenses.

For all the reports about turmoil in the industry, Wells Fargo has turned its mortgage business into a steady profit machine. In the first quarter it handled $110 billion in mortgage originations. “We saw robust growth across the entire bank, proving that there is a lot of value in a strong, diversified business,” said chief financial officer Timothy J. Sloan.

Between 2010 and the first quarter of 2013, Wells Fargo managed to double its return on assets. What this means is that over the past three years, the company has doubled its effectiveness at generating fresh profits from its lending activities.

And yet, the bank’s price-to-earnings (P/E) ratio hovers at around 11, perhaps because investors see the mortgage industry as inherently volatile. But if any company has shown it can be consistently successful in this market, it’s Wells Fargo.

Many analysts have been cautious on recommending the stock, on the theory that mortgage refinancing will decline as interest rates rise. That’s certainly a genuine concern, but the market seems to have overreacted to it, and some of the loss of refinancing business will be offset by new mortgage originations.

Wells Fargo is the fourth largest bank in the US by assets, and the largest bank by market capitalization. It’s the second largest bank in deposits, home mortgage servicing, and debit cards. In 2011, Wells Fargo was the 23rd largest company in the United States.

The 21st-century incarnation of the bank is the result of a 1998 merger between San Francisco-based Wells Fargo & Company and Minneapolis-based Norwest Corporation. Although Norwest was technically the surviving company, the new bank called itself “Wells Fargo” because the name has been well-known in American business for more than a century (as fans of the Broadway classic The Music Man are aware).

Wells Fargo increased its reach advantage when it acquired Charlotte-based Wachovia in 2008. The company now has more than 9,000 retail branches and 12,198 automated teller machines in 41 states.

The company has proved to be more innovative than some of its competitors in providing successful new products for consumers.

Wells Fargo Home Mortgage customers with a Home Rebate Card have used their rewards to pay down $50 million in mortgage balances since the card’s launch in 2007. Virtually every purchase a customer makes with the card counts toward rebates credited to the principal on their Wells Fargo Home Mortgage loan.

These rebates are applied automatically in $25 increments until the mortgage loan is paid off. The rebate can help customers potentially reduce their long-term mortgage interest by thousands of dollars and lower the number of their remaining payments on fixed rate loans.

So much financial business is now done electronically that you may think that the old brick-and-mortar bank is a thing of the past. But Wells Fargo has a strong presence in smaller communities where folks still like to go to the bank to transact serious business, and it has worked hard to maintain its market share in that area.

The company is launching a new banking store concept, the neighborhood bank format, that has been created to deliver the kind of on-site banking experience that customers expect, but in a smaller format that allows the company to offer store locations with personalized service, in settings not suitable for its larger stores.

The new sites are  approximately 1,000 square feet and offer a paperless, secure workflow as well as wireless technology that helps employees provide faster service, as well as new large-screen ATMs.

“With this new store concept, we’ll be able to offer person to person sales and service along with leading banking technology in settings that previously would have discouraged us from building a store,” said Jonathan Velline, head of Wells Fargo ATM Banking and Store Strategy.

Just as generals often fight the last war, investors sometimes focus too much on the last financial crisis (and ignore the seeds of the next one). The banking sector will always be somewhat volatile, but Wells Fargo has proven itself a consistent winner.

Thomas Scarlett is an investment analyst at Personal Finance and its parent website, Investing Daily.




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