netrashetty
Netra Shetty
Wells Fargo & Company is a diversified financial services company with operations around the world. Wells Fargo is the fourth largest bank in the US by assets and the largest bank by market capitalization.[2] Wells Fargo is the second largest bank in deposits, home mortgage servicing, and debit card. In 2007 it was the only bank in the United States to be rated AAA by S&P,[3] though its rating has since been lowered to AA-[4] in light of the financial crisis of 2007–2010.
The firm's primary U.S. operating subsidiary is national bank Wells Fargo Bank, N.A., which designates its main office as Sioux Falls, South Dakota for legal purposes.
Wells Fargo in its present form is a result of an acquisition of California-based Wells Fargo & Company by Minneapolis-based Norwest Corporation in 1998. Although Norwest was technically the surviving entity, the new company renamed itself Wells Fargo, capitalizing on the 150-year history of the nationally-recognized name and its trademark stagecoach. Following the acquisition, the company transferred its headquarters to Wells Fargo's headquarters in San Francisco and merged its operating subsidiary with Wells Fargo's operating subsidiary in Sioux Falls.
In 2010 Wells Fargo had 6,335 retail branches (called stores by Wells Fargo), 12,094 automated teller machines, 281,000 employees and over 70 million customers. Wells Fargo operates stores and ATMs under Wells Fargo's and Wachovia's names.
Wells Fargo is one of the Big Four banks of the United States with Bank of America, Citigroup and JP Morgan Chase
Wells Fargo & Company (NYSE:WFC), with $1.2 trillion in total assets as of December 31, 2009, is the fourth largest bank holding company in the United States.[1] Wells Fargo & Company is best classified as a diversified financial services company, and with over 80 distinct businesses, Wells Fargo offers a full range of financial products and services and targets all types of clients, from individuals to large corporations in all 50 states as well as the District of Columbia. During 2009, Wells Fargo posted a $12.3 billion net income on total revenues of $99 billion.
Wells Fargo became the nation's largest mortgage lender and the second-largest diversified financial services firm in the United States in term of deposits after acquiring Wachovia (WB) on December 31, 2008.[2][3] There was a legal dispute with the deal however, as Citigroup had sought to acquire Wachovia as well. On November 20, 2010 Wells Fargo and Citigroup reached a settlement, with Wells Fargo paying Citigroup $100 million to settle the lawsuits.[4] Wells Fargo's sold $12.6 billion in common stock and $25 billion in preferred stock to the US Government through former U.S. Treasury Secretary Paulson's $700B Troubled Assets Relief Program (TARP) as part of the deal to raise enough cash for the acquisition.[5][6][7]
On July 7, 2010, Wells Fargo announced it is shutting down its consumer-finance branch network; as a result, it is cutting 3,800 jobs and closing down 638 branches.[8] Wells Fargo said it made this decision in order to streamline its operations in the wake of acquiring Wachovia in 2008.
Contents
1 Company Overview
1.1 Business and Financial Metrics
1.2 Business Segments
1.2.1 Community Banking ($8.6 billion in Net Income, 63.7% of 2009 Total Net Income)
1.2.2 Wholesale Banking ($3.9 billion, 28.9%)
1.2.3 Wealth, Brokerage, and Retirement ($1 billion, 7.4%)
2 Trends and Forces
2.1 Wells Fargo has teamed up with Visa (V) to pilot test mobile payments system
2.2 Effects of housing market slowdown
2.3 Subprime bust avoidance
2.4 Interest Rates Sensitivity
2.5 Potential implementation of "Financial Crisis Responsibility Fee"
3 Competition
4 References
For the fourth quarter of 2010, Wells Fargo posted a net income of $3.4 billion, a 21% increase from its 2009 fourth quarter net income of $2.8 billion.[9] Wells Fargo attributed much of this increase to double digit revenue growth across a broad set of its business units as well as improving asset quality; as a result, Wells Fargo was able to reduce its loan loss reserves by $850 million.
Company Overview
Like virtually all major banks, Wells Fargo has been negatively impacted by the 2007 Credit Crunch and the subsequent economic decline. However, unlike many other banks, Wells Fargo has not been forced to write down large losses on its assets. Despite this, the Standard & Poor's Rating Service downgraded Wells Fargo from its AAA rating to AA+ after its acquisition of Wachovia.[2] During the first quarter of 2009, Berkshire Hathaway (BRK) manager Warren Buffett raised his stake in Wells Fargo by 12 million shares, signaling Buffett believes the company's performance will continue to do well.[10] During the third quarter of 2009, Buffett further increased his stake in Wells Fargo by more than 10 million shares in another show of support for Wells Fargo.[11]
On September 25, 2009, Newsweek magazine ranked Wells Fargo the "Greenest Bank" in America, having helped environmentally friendly businesses with over $5.0 billion in financing.[12] With growing concern about global climate change and other environmental issues, Wells Fargo's initiative and lead among financial companies may give it an advantage in the future among its potential clients.
On December 15, 2009, Wells Fargo raised $12.25 billion in a stock sale to help repay the $25 billion in Troubled Assets Relief Program (TARP) money that it received from the government during the 2008 Financial Crisis.[13] Although this diluted Wells Fargo's shares by approximately ten percent, it allows the bank to avoid paying an annual dividend to the government of $1.25 billion and frees it of government oversight, making it more flexible.
For the second quarter of 2010, Wells Fargo posted a net income of $3.06 billion on revenues of $21.4 billion.[14] While the net income was lower than the previous year's, it still topped analyst estimates. However, Wells Fargo reported an increase in problematic loans for this quarter, the only one of the four largest banks to have such an increase (the other three are Bank of America (BAC), J P Morgan Chase (JPM), and Citigroup (C).
For the third quarter of 2010, Wells Fargo posted a record net income of $3.34 billion, or 60 cents a share.[15] The net income was a slight increase from its 2009 profits of $3.24 billion.
Business and Financial Metrics
Wells Fargo Financials (In Millions) 2007[16] 2008[17] 2009[17]
Net Interest Income 16,035 9,164 24,656
Total Non Interest Income 18,546 16,734 43,362
Total Non Interest Expense 22,746 22,598 49,020
Net Income 8,057 2,655 12,275
Business Segments
Wells Fargo separates its businesses into three main segments for revenue reporting purposes: i) Community Banking, ii) Wholesale Banking, and iii) Wealth, Brokerage, and Retirement. Prior to 2009, the Brokerage and Retirement segment was named Wells Fargo Financial.
Community Banking ($8.6 billion in Net Income, 63.7% of 2009 Total Net Income)
Wells Fargo's Community Banking business serves small business clients (with up to $20 million in annual sales) as well as retail customers and high-net-worth individuals, providing them with a wide range of services such as investment, insurance and trust services, among others. It offers its products through a variety of channels, including the company's regional banking branches, over 6,700 ATMs, website, and telephone banking service. In 2009, Wells Fargo began reporting Wells Fargo Financial under Community Banking.
Wells Fargo's substantial credit card business now lies under Community Banking, and it has issued over 7.7 million credit cards and over 20 million debit cards, making it the second largest debit card issuer in the U.S.[18] As a credit card issuer, it charges interchange fees (fees charged to merchants who accept credit cards), interest on outstanding customer balances, and a variety of other fees charged to customers, such as late or missing payment fees, exceeding the card's credit limit, and monthly or annual membership fees. Wells Fargo also has costs related to credit cards, such as interest expense (Wells Fargo generally borrows the money that it lends to credit card customers), fraud, and rewards (in order to compete with each other, banks offer cash-back rewards and bonus point systems to lure customers; these generate costs that the credit card issuer must bear).
Wells Fargo's Community Banking segment earned $8.6 billion in net income from its $59 billion in revenues during 2009.[19] This represented a substantial increase from its 2008 earnings of $2.1 billion on revenues of $33 billion in 2008.[19] Wells Fargo attributed the strong growth to a large increase in mortgage originations, as they increased from $230 billion in 2008 to $420 billion in 2009.[19]
Wholesale Banking ($3.9 billion, 28.9%)
Wells Fargo's Wholesale Banking Group serves the company's business clients with annual sales exceeding $10 million. Wholesale Banking is responsible for a line of corporate, commercial, and real estate banking products and services, including institutional investments, employee benefit trusts, investment banking, construction loans, and insurance. After the Wachovia Bank acquisition, Wells Fargo was able to expand its product services to include investment banking, equity trading, fixed-income sales and trading, and equity and fixed-income research, among others.
Net income for Wholesale Banking grew from $1.4 billion in 2008 to $3.9 billion in 2009, as its revenues also increased from $8.2 billion to $20.3 billion.ref name=WFCAR2009Pg45 /> Wells Fargo attributed this increase to broad based growth across its many businesses as well as stabilizing capital markets. Also, with over 750 offices world wide, its Wholesale Banking segment saw significant growth in the number of middle market companies that got loans.
Wealth, Brokerage, and Retirement ($1 billion, 7.4%)
Wells Fargo's Wealth, Brokerage, and Retirement segment provides a full range of financial services to high net worth and affluent individuals. The products offered by this segment include financial planning, private banking, credit, investment management, trust and estate services, and business succession planning, among others.[20]
During 2009, this segment had a net income of $1 billion from its revenues of $11.5 billion.[19] Wells Fargo believes earnings were hurt by the extremely low yield on U.S. Treasury Bills and the low interest rate environment in general.
Trends and Forces
Wells Fargo has teamed up with Visa (V) to pilot test mobile payments system
Wells Fargo announced in December of 2010 that it has teamed up with Visa to pilot test a mobile payments system using smartphones such as the iPhone and Blackberry. The pilot will be conducted by 200 employees of Wells Fargo in San Francisco, where both Visa and Wells Fargo are headquartered.[21] This announcement came shortly after three of the largest telecom carriers (AT&T (T), Verizon Communications (VZ), and T-Mobile announced a joint venture for mobile payments. The upcoming struggle for mobile payments dominance between credit card companies and telecom companies may have huge implications for future earnings as this market begins to develop.
Effects of housing market slowdown
The U.S. housing market had a slowdown that began in 2007, and as it continued into 2008, 2009 and 2010, Wells Fargo's mortgage lending business was hit by slow growth and falling residential real estate prices. The economy as a whole experienced the "home equity effect", where homeowners perceive their house values to be lower than they anticipated, and therefore perceive themselves to be relatively less wealthy. As a result, consumers spend and consume less. The number of total housing starts has fallen 63% since peak levels during the end of the housing boom.[22] During the last quarter of 2008, the nation's banks recorded a total of $26.2 billion in losses and faced a weighted average of 94% fall in profits.[23] Wells Fargo Home Mortgages have taken a setback, with higher provisions for credit losses offsetting revenue growth in 2008. However, Wells Fargo has been dealing with the mortgage setbacks relatively well due to its wide diversification in product offerings, which allows the company to compensate for poor performance in the home mortgage business.
Subprime bust avoidance
The housing slowdown is often attributed to the collapse of the subprime lending market. Subprime lending, or lending money to customers with poor credit scores (riskier borrowers), can lead to higher loan losses in harsh economic climates or during periods of stagnant or falling housing prices. As customers find themselves unable to make their debt payments, which are higher than average to begin with, defaults rise.
Wells Fargo has fared better than most competitors in the mortgage business, mainly because its mortgages are predominately prime and near-prime. As a result, Wells Fargo has not experienced high rates of default seen in the subprime market. Wells Fargo has avoided much of these losses by deciding not to extend or purchase option adjustable rate mortgages (option ARMs). However, Wachovia Bank, which was acquired by Wells Fargo, took part in Option ARMs and subprime lending. Wachovia has $122 billion in outstanding subprime loans and a loan loss of 29% or $36 billion is expected.[24] Despite this prediction, the changing economic situation has made existing models unreliable and it is unclear what Wachovia's assets actual default rate will be.
Interest Rates Sensitivity
The Federal Reserve increased the federal funds rate from 4.25% to 5.25% early in 2006, which put upward pressure on interest rates. This had the effect of slowing economic growth and lowering inflation, which partially offset the effects of strong economic expansion (discussed above). Higher interest rates tend to discourage consumer spending and investment, which impacts Wells Fargo in the form of lower balances charged to credit cards, fewer loans and deposits, and reduced business loans. At the same time, higher general interest rates allow WFC to charge its customers higher interest on their loans, which could increase the company's revenue from the loans that customers do take out.
In late 2007 and early 2008, the Fed implemented a series of interest rate cuts, reducing the rate from 5.25% in September of 2007 to 0-.25% in December 2008.[25] These measures were largely aimed at stimulating economic activity in the face of a recession caused by fallout in the subprime lending industry and the 2008 Financial Crisis. Wells Fargo will benefit from these cuts if they have the desired effect of stimulating consumer spending and encouraging businesses to expand.
Potential implementation of "Financial Crisis Responsibility Fee"
Obama announced in January of 2010 a plan to tax the largest banks and financial institutions to recover TARP funds that the government used to bailout many of the banks. The proposed plan calls for a 0.15% tax on each firm's liabilities, excluding Tier 1 capital and those already insured by the FDIC, with the goal of raising $90 billion over ten years.[26] However, the financial institutions subject to this fee are limited to only those with over $50 billion in assets. If this plan gets passed into law, it could represent a substantial cost to Wells Fargo for up to ten years.
Competition
With 6,795 branches and $760 billion in total domestic deposits, Wells Fargo has the most offices and the second most deposits in the United States.[27] Since Wells Fargo focuses its business operations on the domestic U.S. market, its major nationwide competitors include Bank of America (BAC), JP Morgan Chase (JPM), and Citigroup (C). Wells Fargo's lack of international exposure contrasts with these top competitors. Although Wells Fargo holds assets overseas, its remains strongly focused on the United States domestic market. While this does allow Wells Fargo to focus its resources on gaining greater market share within the U.S., Wells Fargo is thereby more vulnerable to the U.S. economic cycles, as it does not have foreign markets to buffer domestic performance.
Bank of America (BAC) is the world's leading bank and financial holding company with over $907 billion in deposits and 6,238 offices within the United States.[27] In 2009 Bank of America had total revenues of $150 billion in 2009 and net income of $6.3 billion.
JP Morgan Chase (JPM) is one of the world's largest financial services companies, offering both investment banking as well as commercial banking. It has the third most deposits in the United States with $640 billion.[27] In 2009 JP Morgan Chase had $115 billion in total revenues and a net income of $11.7 billion.
Citigroup (C), another of the commercial banking giants, ranks fourth in the United States in terms of deposits with $321 billion.[27] During 2009, Citigroup posted a net loss of $1.61 billion from its 2009 total revenues of $110 billion.
2009 Domestic Deposits Total Deposits (In Billions) Market Share[28]
Wells Fargo (WFC) 759.7 10%
Bank of America (BAC) 907.4 12%
JP Morgan Chase (JPM) 639.8 9%
Citigroup (C) 317.5 4%
The firm's primary U.S. operating subsidiary is national bank Wells Fargo Bank, N.A., which designates its main office as Sioux Falls, South Dakota for legal purposes.
Wells Fargo in its present form is a result of an acquisition of California-based Wells Fargo & Company by Minneapolis-based Norwest Corporation in 1998. Although Norwest was technically the surviving entity, the new company renamed itself Wells Fargo, capitalizing on the 150-year history of the nationally-recognized name and its trademark stagecoach. Following the acquisition, the company transferred its headquarters to Wells Fargo's headquarters in San Francisco and merged its operating subsidiary with Wells Fargo's operating subsidiary in Sioux Falls.
In 2010 Wells Fargo had 6,335 retail branches (called stores by Wells Fargo), 12,094 automated teller machines, 281,000 employees and over 70 million customers. Wells Fargo operates stores and ATMs under Wells Fargo's and Wachovia's names.
Wells Fargo is one of the Big Four banks of the United States with Bank of America, Citigroup and JP Morgan Chase
Wells Fargo & Company (NYSE:WFC), with $1.2 trillion in total assets as of December 31, 2009, is the fourth largest bank holding company in the United States.[1] Wells Fargo & Company is best classified as a diversified financial services company, and with over 80 distinct businesses, Wells Fargo offers a full range of financial products and services and targets all types of clients, from individuals to large corporations in all 50 states as well as the District of Columbia. During 2009, Wells Fargo posted a $12.3 billion net income on total revenues of $99 billion.
Wells Fargo became the nation's largest mortgage lender and the second-largest diversified financial services firm in the United States in term of deposits after acquiring Wachovia (WB) on December 31, 2008.[2][3] There was a legal dispute with the deal however, as Citigroup had sought to acquire Wachovia as well. On November 20, 2010 Wells Fargo and Citigroup reached a settlement, with Wells Fargo paying Citigroup $100 million to settle the lawsuits.[4] Wells Fargo's sold $12.6 billion in common stock and $25 billion in preferred stock to the US Government through former U.S. Treasury Secretary Paulson's $700B Troubled Assets Relief Program (TARP) as part of the deal to raise enough cash for the acquisition.[5][6][7]
On July 7, 2010, Wells Fargo announced it is shutting down its consumer-finance branch network; as a result, it is cutting 3,800 jobs and closing down 638 branches.[8] Wells Fargo said it made this decision in order to streamline its operations in the wake of acquiring Wachovia in 2008.
Contents
1 Company Overview
1.1 Business and Financial Metrics
1.2 Business Segments
1.2.1 Community Banking ($8.6 billion in Net Income, 63.7% of 2009 Total Net Income)
1.2.2 Wholesale Banking ($3.9 billion, 28.9%)
1.2.3 Wealth, Brokerage, and Retirement ($1 billion, 7.4%)
2 Trends and Forces
2.1 Wells Fargo has teamed up with Visa (V) to pilot test mobile payments system
2.2 Effects of housing market slowdown
2.3 Subprime bust avoidance
2.4 Interest Rates Sensitivity
2.5 Potential implementation of "Financial Crisis Responsibility Fee"
3 Competition
4 References
For the fourth quarter of 2010, Wells Fargo posted a net income of $3.4 billion, a 21% increase from its 2009 fourth quarter net income of $2.8 billion.[9] Wells Fargo attributed much of this increase to double digit revenue growth across a broad set of its business units as well as improving asset quality; as a result, Wells Fargo was able to reduce its loan loss reserves by $850 million.
Company Overview
Like virtually all major banks, Wells Fargo has been negatively impacted by the 2007 Credit Crunch and the subsequent economic decline. However, unlike many other banks, Wells Fargo has not been forced to write down large losses on its assets. Despite this, the Standard & Poor's Rating Service downgraded Wells Fargo from its AAA rating to AA+ after its acquisition of Wachovia.[2] During the first quarter of 2009, Berkshire Hathaway (BRK) manager Warren Buffett raised his stake in Wells Fargo by 12 million shares, signaling Buffett believes the company's performance will continue to do well.[10] During the third quarter of 2009, Buffett further increased his stake in Wells Fargo by more than 10 million shares in another show of support for Wells Fargo.[11]
On September 25, 2009, Newsweek magazine ranked Wells Fargo the "Greenest Bank" in America, having helped environmentally friendly businesses with over $5.0 billion in financing.[12] With growing concern about global climate change and other environmental issues, Wells Fargo's initiative and lead among financial companies may give it an advantage in the future among its potential clients.
On December 15, 2009, Wells Fargo raised $12.25 billion in a stock sale to help repay the $25 billion in Troubled Assets Relief Program (TARP) money that it received from the government during the 2008 Financial Crisis.[13] Although this diluted Wells Fargo's shares by approximately ten percent, it allows the bank to avoid paying an annual dividend to the government of $1.25 billion and frees it of government oversight, making it more flexible.
For the second quarter of 2010, Wells Fargo posted a net income of $3.06 billion on revenues of $21.4 billion.[14] While the net income was lower than the previous year's, it still topped analyst estimates. However, Wells Fargo reported an increase in problematic loans for this quarter, the only one of the four largest banks to have such an increase (the other three are Bank of America (BAC), J P Morgan Chase (JPM), and Citigroup (C).
For the third quarter of 2010, Wells Fargo posted a record net income of $3.34 billion, or 60 cents a share.[15] The net income was a slight increase from its 2009 profits of $3.24 billion.
Business and Financial Metrics
Wells Fargo Financials (In Millions) 2007[16] 2008[17] 2009[17]
Net Interest Income 16,035 9,164 24,656
Total Non Interest Income 18,546 16,734 43,362
Total Non Interest Expense 22,746 22,598 49,020
Net Income 8,057 2,655 12,275
Business Segments
Wells Fargo separates its businesses into three main segments for revenue reporting purposes: i) Community Banking, ii) Wholesale Banking, and iii) Wealth, Brokerage, and Retirement. Prior to 2009, the Brokerage and Retirement segment was named Wells Fargo Financial.
Community Banking ($8.6 billion in Net Income, 63.7% of 2009 Total Net Income)
Wells Fargo's Community Banking business serves small business clients (with up to $20 million in annual sales) as well as retail customers and high-net-worth individuals, providing them with a wide range of services such as investment, insurance and trust services, among others. It offers its products through a variety of channels, including the company's regional banking branches, over 6,700 ATMs, website, and telephone banking service. In 2009, Wells Fargo began reporting Wells Fargo Financial under Community Banking.
Wells Fargo's substantial credit card business now lies under Community Banking, and it has issued over 7.7 million credit cards and over 20 million debit cards, making it the second largest debit card issuer in the U.S.[18] As a credit card issuer, it charges interchange fees (fees charged to merchants who accept credit cards), interest on outstanding customer balances, and a variety of other fees charged to customers, such as late or missing payment fees, exceeding the card's credit limit, and monthly or annual membership fees. Wells Fargo also has costs related to credit cards, such as interest expense (Wells Fargo generally borrows the money that it lends to credit card customers), fraud, and rewards (in order to compete with each other, banks offer cash-back rewards and bonus point systems to lure customers; these generate costs that the credit card issuer must bear).
Wells Fargo's Community Banking segment earned $8.6 billion in net income from its $59 billion in revenues during 2009.[19] This represented a substantial increase from its 2008 earnings of $2.1 billion on revenues of $33 billion in 2008.[19] Wells Fargo attributed the strong growth to a large increase in mortgage originations, as they increased from $230 billion in 2008 to $420 billion in 2009.[19]
Wholesale Banking ($3.9 billion, 28.9%)
Wells Fargo's Wholesale Banking Group serves the company's business clients with annual sales exceeding $10 million. Wholesale Banking is responsible for a line of corporate, commercial, and real estate banking products and services, including institutional investments, employee benefit trusts, investment banking, construction loans, and insurance. After the Wachovia Bank acquisition, Wells Fargo was able to expand its product services to include investment banking, equity trading, fixed-income sales and trading, and equity and fixed-income research, among others.
Net income for Wholesale Banking grew from $1.4 billion in 2008 to $3.9 billion in 2009, as its revenues also increased from $8.2 billion to $20.3 billion.ref name=WFCAR2009Pg45 /> Wells Fargo attributed this increase to broad based growth across its many businesses as well as stabilizing capital markets. Also, with over 750 offices world wide, its Wholesale Banking segment saw significant growth in the number of middle market companies that got loans.
Wealth, Brokerage, and Retirement ($1 billion, 7.4%)
Wells Fargo's Wealth, Brokerage, and Retirement segment provides a full range of financial services to high net worth and affluent individuals. The products offered by this segment include financial planning, private banking, credit, investment management, trust and estate services, and business succession planning, among others.[20]
During 2009, this segment had a net income of $1 billion from its revenues of $11.5 billion.[19] Wells Fargo believes earnings were hurt by the extremely low yield on U.S. Treasury Bills and the low interest rate environment in general.
Trends and Forces
Wells Fargo has teamed up with Visa (V) to pilot test mobile payments system
Wells Fargo announced in December of 2010 that it has teamed up with Visa to pilot test a mobile payments system using smartphones such as the iPhone and Blackberry. The pilot will be conducted by 200 employees of Wells Fargo in San Francisco, where both Visa and Wells Fargo are headquartered.[21] This announcement came shortly after three of the largest telecom carriers (AT&T (T), Verizon Communications (VZ), and T-Mobile announced a joint venture for mobile payments. The upcoming struggle for mobile payments dominance between credit card companies and telecom companies may have huge implications for future earnings as this market begins to develop.
Effects of housing market slowdown
The U.S. housing market had a slowdown that began in 2007, and as it continued into 2008, 2009 and 2010, Wells Fargo's mortgage lending business was hit by slow growth and falling residential real estate prices. The economy as a whole experienced the "home equity effect", where homeowners perceive their house values to be lower than they anticipated, and therefore perceive themselves to be relatively less wealthy. As a result, consumers spend and consume less. The number of total housing starts has fallen 63% since peak levels during the end of the housing boom.[22] During the last quarter of 2008, the nation's banks recorded a total of $26.2 billion in losses and faced a weighted average of 94% fall in profits.[23] Wells Fargo Home Mortgages have taken a setback, with higher provisions for credit losses offsetting revenue growth in 2008. However, Wells Fargo has been dealing with the mortgage setbacks relatively well due to its wide diversification in product offerings, which allows the company to compensate for poor performance in the home mortgage business.
Subprime bust avoidance
The housing slowdown is often attributed to the collapse of the subprime lending market. Subprime lending, or lending money to customers with poor credit scores (riskier borrowers), can lead to higher loan losses in harsh economic climates or during periods of stagnant or falling housing prices. As customers find themselves unable to make their debt payments, which are higher than average to begin with, defaults rise.
Wells Fargo has fared better than most competitors in the mortgage business, mainly because its mortgages are predominately prime and near-prime. As a result, Wells Fargo has not experienced high rates of default seen in the subprime market. Wells Fargo has avoided much of these losses by deciding not to extend or purchase option adjustable rate mortgages (option ARMs). However, Wachovia Bank, which was acquired by Wells Fargo, took part in Option ARMs and subprime lending. Wachovia has $122 billion in outstanding subprime loans and a loan loss of 29% or $36 billion is expected.[24] Despite this prediction, the changing economic situation has made existing models unreliable and it is unclear what Wachovia's assets actual default rate will be.
Interest Rates Sensitivity
The Federal Reserve increased the federal funds rate from 4.25% to 5.25% early in 2006, which put upward pressure on interest rates. This had the effect of slowing economic growth and lowering inflation, which partially offset the effects of strong economic expansion (discussed above). Higher interest rates tend to discourage consumer spending and investment, which impacts Wells Fargo in the form of lower balances charged to credit cards, fewer loans and deposits, and reduced business loans. At the same time, higher general interest rates allow WFC to charge its customers higher interest on their loans, which could increase the company's revenue from the loans that customers do take out.
In late 2007 and early 2008, the Fed implemented a series of interest rate cuts, reducing the rate from 5.25% in September of 2007 to 0-.25% in December 2008.[25] These measures were largely aimed at stimulating economic activity in the face of a recession caused by fallout in the subprime lending industry and the 2008 Financial Crisis. Wells Fargo will benefit from these cuts if they have the desired effect of stimulating consumer spending and encouraging businesses to expand.
Potential implementation of "Financial Crisis Responsibility Fee"
Obama announced in January of 2010 a plan to tax the largest banks and financial institutions to recover TARP funds that the government used to bailout many of the banks. The proposed plan calls for a 0.15% tax on each firm's liabilities, excluding Tier 1 capital and those already insured by the FDIC, with the goal of raising $90 billion over ten years.[26] However, the financial institutions subject to this fee are limited to only those with over $50 billion in assets. If this plan gets passed into law, it could represent a substantial cost to Wells Fargo for up to ten years.
Competition
With 6,795 branches and $760 billion in total domestic deposits, Wells Fargo has the most offices and the second most deposits in the United States.[27] Since Wells Fargo focuses its business operations on the domestic U.S. market, its major nationwide competitors include Bank of America (BAC), JP Morgan Chase (JPM), and Citigroup (C). Wells Fargo's lack of international exposure contrasts with these top competitors. Although Wells Fargo holds assets overseas, its remains strongly focused on the United States domestic market. While this does allow Wells Fargo to focus its resources on gaining greater market share within the U.S., Wells Fargo is thereby more vulnerable to the U.S. economic cycles, as it does not have foreign markets to buffer domestic performance.
Bank of America (BAC) is the world's leading bank and financial holding company with over $907 billion in deposits and 6,238 offices within the United States.[27] In 2009 Bank of America had total revenues of $150 billion in 2009 and net income of $6.3 billion.
JP Morgan Chase (JPM) is one of the world's largest financial services companies, offering both investment banking as well as commercial banking. It has the third most deposits in the United States with $640 billion.[27] In 2009 JP Morgan Chase had $115 billion in total revenues and a net income of $11.7 billion.
Citigroup (C), another of the commercial banking giants, ranks fourth in the United States in terms of deposits with $321 billion.[27] During 2009, Citigroup posted a net loss of $1.61 billion from its 2009 total revenues of $110 billion.
2009 Domestic Deposits Total Deposits (In Billions) Market Share[28]
Wells Fargo (WFC) 759.7 10%
Bank of America (BAC) 907.4 12%
JP Morgan Chase (JPM) 639.8 9%
Citigroup (C) 317.5 4%
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