The defining character of bank results up until Wells Fargo was (a) rapidly improving credit and (b) declining revenue.
When I state that bank credit in the US is clearly and unambiguously improving my email runs hot with people arguing that the banks are faking it. But they are not – and there are lots of tests of that. The problem was and remains revenue – the extreme out come is the Japanese outcome – banking without revenue, credit losses, glamour or highly paid bankers.
But the Wells Fargo result was different. Revenue was flat. That result is so much stronger than the competition it is silly. Moreover interest margins were up. Again – this differs sharply from the competition. One correspondent wrote to me and tells us that Wells Fargo shows how it is done. However that does not do the problem justice. The numbers do not tell you how it is done – they just tell you that it is being done (provided the numbers are not faked).
My best guess is that Wells is using its (legendary) ability to extract revenue from a customer base to either service better or screw over (depending on your perspective) the customers of Wachovia. This quote I think is the story:
The merger integration activities are proceeding on track and the combined company continues to produce financial results including revenue synergies better than our original expectations.
Now I have seen a lot of banking mergers with dodgy estimates of “revenue synergies”. After all revenue synergies means extracting more financial services revenue from customers than they were previously paying – and – as even the most casual observer has noticed – most Americans pay a lot of revenue to financial institutions.
But in this case they are ex-post claiming “revenue synergies” and – the numbers show – are probably achieving them.
So this is a call to former Wachovia customers. What is it that Wells Fargo has changed so that you pay more money to the bank?
Comments please.
PS. Obviously this is part of it – but it does not explain all the numbers:
Year over year, CDs declined $63 billion, primarily the result of $57 billion of higher-cost Wachovia CDs maturing, yet total core deposits were down only $3.9 billion from a year ago. Checking and savings deposits represented 88 percent of total core deposits. Our average deposit cost was 35 basis points.”
19 comments:
Apparently, WF is best at cross selling:
http://www.bloomberg.com/news/2010-06-22/wells-fargo-says-eight-is-great-as-banks-cross-sell-to-replace-lost-growth.html
http://www.bloomberg.com/news/2010-07-21/wells-fargo-s-atkins-sees-wachovia-cross-selling-rising-video.html
I know that - the view was "legendary" - but I am not sure how possible it is to keep extracting more revenue from customers - even if Wells does this staggeringly well...
I am trying to get to the mechanics of what they do.
Also - if cross selling were the driver why are the credit card balances so low?
J
As you don't seem to get answers. I am a Wells Fargo customer, but not Wachovia. My account was advertised to be free as a special deal via my employer.
The local branch is in a wealthy town, very large office, always empty. The employees friendly but not technically savvy or interested in helping with problems. I had great technical support via India though (not many samples).
Even though the account was supposed to be free, WF tried charging me unexpectedly at different occasions. Once a bank statement printed from their ATM was billed with USD 1. At another time they tried charging me a monthly fee if I remember properly, but reversed it. Finally, they gave me a credit card with fairly high limit and 0 percent APR for 9 months even after the crisis started, but tried charging me interest and late fees after 3 months. Again, reversed.
I got really pissed off with Wells Fargo. The only reason I am still with them is that all the large banks suck, but Wells Fargo seems to have the best online bill pay in the area. All they get from me now is a checking account deposit yielding 0 percent interest. They are not going to cross sell me anything. But I am curious how others are faring.
I moved from MN, where I had Wells, to CT, where I had to transfer to Wachovia. I can't say from observation why Wells is outperforming, but we certainly have been part of the upsell, buying a competitively priced mortgage on top of our existing accounts. We have not been getting killed by fees, per your inference.
One thing WFC has done is increase fees on withdrawals from non-Wachovia ATM's from $2.00 to $2.50. This infuriates me to no end.
I don't like WFC. Their fees are terrible. I will never use them for anything serious such as my retirement account.
By the way, I tend to think this quarter will be better for the banks than last quarter. The panic over sovereign debt crisis is probably over even if the crisis itself will take 3 more years to play out.
I'm a former Wells (not Wachovia) customer. Left since they were trying to force me into a fee-paying checking account (advertised of course as "no fee").
We'll see if they can maintain the good performance.
John,
Are you long WFC? I've been doing some work on it, and the stock seems very very cheap to me, even if their cross selling efforts end up not as successful as they are hoping.
PPTI is tracking 35-40 billion per year... Even if there are huge problems in the loan book (750B) they are not saying, they will continue to build capital at a rapid pace.
I figure normalized credit losses are maybe 8-9 billion. Figure a 35% average tax rate, and you are buying a world class "boring" community bank at well less than 10x earnings and not much above book.
My 2c anyway. I own the WFC warrants as well.
I've heard from friends that had a checking or savings account from them, but no mortgage with WFC, who were notified that WFC purchased their mortgage. That is one, probably smart, way to up products per household.
John, this is somewhat of a more general question, but are you worried at all about the appointment of someone like Elizabeth Warren to the CFPB, in terms of cracking down on all the ways banks extract value from their customers, or in terms of banks being coerced into making principal reductions on their mortgage book? I would appreciate any response, even if the answer is "no".
Thanks, Andrew
John,
WFC have been quite emphatic about repricing the (former) high cost WB CD base. They've repriced the bulk of them down by now and have managed to keep well north of 60% of those deposit customers. That's why the NIM% keeps inching up. WFC (e.g. Norwest) management is very good at what they do best, which is retail banking (x-sell and basic blocking and tackling). Credit costs looked to have peaked in late '09 as well.
BTW, WFC booked a very large 1 time $500M reserve release through their commercial loan book that was recorded as NIM in Q2.
This is distinct from releasing losses into the accretable yield which will be recognized slowly.
WFC's balance sheet is still shrinking and it sounds like will keep shrinking for a while, because they have such a large runoff portfolio ($120B I think vs $750B loan book).
What's missing from this analysis is a branch level inquiry into how the sausage is truly made. WFC branch managers routinely fake their numbers through a variety of illicit means:
1) Getting branch personnel and their friends and family to recycle accounts. Accounts are routinely opened and closed to make quarterly numbers.
2) Selling needless items such as additional debit cards or opening new accounts behind the backs of customers.
3) Getting illegal immigrants without proper IDs to sign up for accounts.
You get fired if you don't engage in this fraud.
Don't believe me? Try talking with some branch personnel and find out for yourself.
Any idea why is Visa is doing well while banks are not?
http://blogs.wsj.com/marketbeat/2010/07/28/visa-earnings-top-and-bottom-line-beat/
John, I have pointed out before how I think that massive amounts of cash are headed for California.
I have a Wachovia Way2Save account (one of Wachovia's futile attempts to attract enough high-cost deposit funding to stay liquid and maybe find some mortgage customers), and WF still hasn't converted such accounts in my state to WF accounts. This puts them way behind the pace Chase set on WaMu conversions. I have not heard much from WF by way of cross-selling. Get a lot more marketing from Chase/BofA. Color me not impressed.
I worry about the sustainability of WF's NIM. I figure that a lot of people have just given up on earning a decent yield, but if deposit rates ever go back to 5% WF may lose some of the deposit base...there's not much difference between 0% and 1%, but if people can make 5% they may not be so lazy about leaving money in non-interest-bearing accounts. They also must be taking a ton of interest rate risk to maintain that kind of spread.
The last thing about WFC is that you do pay a significant premium over JPM and BAC for the stock. I would stick with BAC if you want cheap consumer exposure or JPM if you want quality. WFC does give you much less i-banking risk and many fewer complete idiots working at high levels of your company, but I'd look to get into it cheaper than current levels.
I am a 20 year wachovia customer in NC. Still call it wachovia because the name on the door or on statements has not changed to wells fargo.
I have had 2 credit lines for years, one 4.5 k backed up my checking account and the other 22.5k was a stand alone line. Wachovia never charged any fees for these lines and i only used the 22.5 k line twice in 15 years. Never carried a balance on them. Now, I suddenly get a notice that there is a $50 annual fee to keep each line open. So Wells Fargo is definitely changing the wachovia fee structure. I closed the smaller line, but paid the $50 to keep the larger one.
No telling what is next, maybe even a fee for the safe deposit box i have had for 20 years that came free with the wachovia crown checking account.
http://www.latimes.com/business/la-fi-wells-20100810,0,5994603.story
Wells Fargo changed the way it treated customers' daily debit transactions and cash withdrawals in December 2001, according to the lawsuit filed in 2007. Transactions with the highest dollar amount posted first, rather than in the order they occurred.
The practice resulted in more overdrafts, with customers overdrawing their accounts by small amounts multiple times a day, according to the complaint. The change allegedly was intended to boost revenue from overdraft fees, which ranged from $18 to $35 for each overdraft.
WFC loses big on a fee manipulation lawsuit:
http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2010/08/11/BU4C1ES0MU.DTL&tsp=1
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