Must-know: Is Wells Fargo making boring attractive for investors?

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Nov. 20 2020, Updated 3:52 p.m. ET

Wells Fargo isn’t attractive, but it’s profitable

Wells Fargo’s (WFC) broad operation level strategy over the long run can be described by two words—slow and steady. It doesn’t take many risks. Wells Fargo is the antithesis of glamorous investment banks like Goldman Sachs. It’s stable and boring.

 

Events after the sub-prime crisis have shown that boring could be attractive for investors. In the last five years, Wells Fargo outperformed its competitors like Bank of America (BAC), JP Morgan (JPM), and Citibank (C). However, some of smaller banks that accept deposits—like U.S. Bank and Capital One—have done better than Wells Fargo. U.S. Bank and Capital One are part of the Financial Select Sector SPDR (XLF).

Banking business

The graph above shows banking’s basic business model for any bank that accepts deposits. For a bank to be successful it needs to:

  • Increase its customer base
  • Increase revenue from each customer
  • Increase both of the above metrics

In contrast, a bank also needs to decrease its major costs. A bank’s major costs are:

  • Cost of the interest it pays on its deposits
  • Cost of servicing customers—including cost on employees
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Each bank improvises on one or more of these parts to create a competitive advantage that’s sustainable. Wells Fargo has its own unique operation level strategy. The strategy involves having more engaged and loyal customers. This will drive revenue. It also plans to be more efficient and leverage technology to cut costs. We’ll discuss this in the next part of the series.

Visit the Market Realist Investment Banking page to learn more.

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