Nancy Bush is a veteran bank analyst. The following does not constitute investment advice, and the views and opinions expressed in this piece are those of the author and do not necessarily represent the views of S&P Global Market Intelligence.
I recently attended — in person, for a change — Wells Fargo & Co.'s Analyst Day, which was (contrary to past practice) held in Charlotte, N.C. this year. The new venue was billed as being for the benefit of us East Coasters who are increasingly hard-pressed by both budgetary and time constraints to make the long haul to San Francisco, which usually takes two days at a minimum and results in several days of mental fog. The Charlotte location was also apparently a recognition that Wells has its highest concentration of employees in the city — roughly 25,000 people, according to management — and I would venture a guess that the employee base there will see the lion's share of company growth in the future (much lower housing costs, higher quality of life, easier commuting than in the Bay Area, etc., etc.).
But it also struck me as I looked around the large meeting room in the Charlotte Sheraton that the crowd there was likely to be a distinctly more friendly one — and one less susceptible to unwanted intrusions from protesters — than the company might have encountered in its West Coast home. And therein lies the problem for investors at this point — any decision about the attractiveness of Wells Fargo's stock as an investment vehicle hinges not only upon the usual set of fundamentals (P/E ratio, dividend yield, premium to tangible book value, etc.) but also upon a complex set of judgments about corporate responsibility, management accountability, political pressures, future regulatory actions, and on and on.
As I was listening to Wells Fargo management give their respective presentations, I could only reflect that the product sales scandal — followed by revelations of some very dubious practices in auto and mortgage lending, the failure of the bank to submit an acceptable plan for resolution, and the rumored lowering of its CAMELS rating, among other issues — would likely have sunk many lesser companies, and for that fact Wells Fargo management, customers and communities should be grateful. Through it all, the bank has retained its ability to lend, to fund its massive charitable foundation, upgrade its delivery choices for customers, and to keep the unfolding drama largely in the background. As a Wells Fargo customer (and shareholder, by means of full disclosure) I have kept up with the headlines but have seen no impact on my ability to do any banking transaction that I might possibly want to do.
I suspect that the same statement could be made about any of the large American banks at this point, and 10 years after the Financial Crisis, I can only marvel at the resilience that our banking system has showed. Yes, I know that the changes mandated by the Dodd-Frank behemoth have accounted for a large portion of this positive outcome, and I think that fact is the reason that large bank CEOs voice support for only limited tinkering with the existing regulatory structure. But it goes beyond the impact of regulation to some very ingrained belief on the part of Americans that their banks are safe and do indeed have the faith and credit of the American government — and not just the funds of the Federal Deposit Insurance Corp. — behind them.
That's why I will continue to believe that the issue of "living wills" — the regulatory dictate that a large bank facing failure will be able to quickly split into its constituent parts and sell itself off, thus resolving the issue without impact to taxpayers — is such an utter fiction and is mainly a sop to the wishful thinking of the Federal Reserve and Congress. What would have happened to the depositor base of Bank of America Corp. — to name the bank that was deemed most likely to founder in the wake of the meltdown — if there had been even a whiff that the bank was about to shut down? I'm sorry, but I do not believe that most of my fellow Americans have the sophistication (or the patience) to parse out the implications of a bank that is being "resolved" versus one that is simply failing, and a massive outflow of liquid deposits — with the attendant hysterical media coverage — would be the likely (and massively destructive) result in the resolution interim.
Wells Fargo was lucky in the timing of its sales "issues" — and I'll bundle them into that catch-all phrase — as any such revelations during the time leading up and into the Financial Crisis would almost certainly have negated any chance for the bank to buy the near-failed Wachovia and thus to have pulled off one of the most lucrative and accretive acquisitions in American banking history. While I know that many pundits, politicians and small bank CEOs decry the concentration of bank assets that occurred as a result of the crisis, I have always suspected that regulators are really quite satisfied with the result.
They saw several problem players (besides Wachovia, WaMu comes most immediately to mind) removed from the field and saw the remaining banks strengthened by the large books of deposits and other liquid assets. And by the way, there were fewer banks to monitor and examine, so what's not to like? I suspect that they are also not so displeased — all the pious rhetoric about the value of community banks notwithstanding — to see the consolidation that is occurring within the community banking sector, as the creation of the mega-community banks will enable stronger competitors to the larger banks and a stronger and more consistent regulatory regime at the smaller end of the asset size spectrum.
There was a great deal of conversation at the Wells Fargo meeting about immediate earnings power in the face of the Fed's cap on the size of the bank's balance sheet, and a number of institutional investors — including the illustrious short-seller Steve Eisman — have voiced skepticism in past weeks about the bank's ability to report increased earnings during this penalty-box interlude. CFO John Shrewsberry and Treasurer Neal Blinde spent a great deal of their time at the meeting addressing the impacts of the asset cap, and it all boils down to the bank's ability to run off higher-cost deposits at the same time that they reduce their exposure to riskier assets.
The end result is that there will be a less-than-expected earnings impact (less than $100 million in an after-tax earnings hit as opposed to the initially anticipated $400 million) — but there was also disclosure that the asset cap will likely stay in place through the first half of 2019 as opposed to being a 2018 event. This extension is likely due to regulators' desire to make sure that the drip-drip-drip of bad news and new findings of problems has truly come to an end. The timing also means that the cap will lift after the political mud-wrestling surrounding the 2018 mid-term elections is over. Unluckily for Wells Fargo, it is the largest piece on the political chessboard right now and the only bank available for bludgeoning by Senator Elizabeth Warren, and the drama with the Fed will continue as a result.
CEO Tim Sloan also said one thing that caught my attention when he was asked about a recent news article alleging wrongdoing in the wealth management unit. His message about the "tiresome" headlines was basically not to believe everything that you read, and that thought came to mind late last week as a provocative headline hit the newswires. The issue — the alteration of documents in the business banking unit by adding Social Security numbers and dates of birth to comply with regulations — does not seem to rise to the level of high crimes and misdemeanors. The bank responded to employee concerns, investigated the practices, and reported their findings to the OCC. Isn't that how it's supposed to work?
Warren Buffett and his sidekick Charlie Munger gave a bit of an affirmation to Wells Fargo management at the Berkshire Hathaway Inc. shareholder meeting on May 5, saying that the bank was correcting its problems and would emerge stronger as a result. And given the history of American banks and their foul-ups, I'd say that their conclusions are correct. But in my view, the key to Wells Fargo's ongoing strength — and to the present vigorous health of American banks generally — remains that massive, low-cost base of core deposits and the ability to foster depositor confidence in the future. The lesson of American banking is that this too shall pass — and that there will always be surprises in the banking industry. My only question at this point is: Who is next?
