More From Saul Perez
Why Wells Fargo leads in loans
The bank has always focused on its bread and butter revenue-earning stream: loans. Over the years, Wells Fargo slowly realized its goal of achieving a strong market share in lending.
Must-know: Determining a bank’s value
The first challenge is that banks are highly regulated and any change in regulations has a huge impact on the valuation of a bank—the second challenge is that it’s difficult to determine cash flow for a bank because both debt and reinvestment are difficult to calculate.
Why Wells Fargo has the highest net interest margin
Maintaining a high net interest margin has always been part of Wells Fargo’s (WFC) strategy. Wells Fargo has consistently been better than the industry’s average net interest margin.
Must-know: Putting the price–to-book value ratio in perspective
We explored the most commonly used valuation metric for financial companies—the price-book value. We also understood the relation between price-book value and return on equity.
Must-know: Is Wells Fargo making boring attractive for investors?
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. It’s stable and boring.
Wells Fargo remains number one in low-cost deposits
Wells Fargo continues to remain a sector leader in raising low-cost deposits. It grew its noninterest deposits by nearly 7.0% compared to 4Q14.
Why Wells Fargo’s future goals will help it grow more
Management sets the vision for an organization. Wells Fargo’s vision is large, but it’s already halfway there. Wells Fargo is the largest bank in the U.S.—by market capitalization.
Traditional assets: Defining active and passive management
Active asset management refers to those asset managers that essentially try to outperform the average market return, a benchmark, or a hurdle rate that may have been set internally.
Why low funding cost is an advantage for Wells Fargo
If a bank is able to keep its cost of deposits low, it will have a competitive advantage. Wells Fargo has the lowest cost of deposits among its peers—despite having a very high deposit base.
Why Wells Fargo focuses on non-interest income
Wells Fargo wants to maintain a balance between its interest income from loans and non-interest income. Non-interest income accounts for nearly 49% of Wells Fargo’s revenues.
Why cross-selling is part of Wells Fargo’s strategy
Wells Fargo’s (WFC) first, and possibly the most important, operational strategy is focusing on cross-selling. It’s the most important pillar of its operational strategy.
Why Wells Fargo is leveraging technology to cut costs
Online banking is the cheapest mode for servicing the customer in the long run. Online banking involves a one-time fixed cost. After that, the maintenance cost is very low.
Why Wells Fargo uses human resources as a strategic tool
Wells Fargo (WFC) believes that people are a competitive advantage source. Integrating sound human resource practices lies at the core of Wells Fargo’s strategy.
Low-cost deposit growth is a key strength for U.S. Bank
U.S. Bank does well in increasing its low-cost deposit base. In 4Q14, money market deposits grew the fastest at 19.7%—compared to 4Q13.
Must-know: The banking landscape
There a large number of players that are each vying for share in the same market—there are a few large players who are present across the U.S., but most banks have pockets of strength.
The main players in asset management
The efficient market hypothesis maintains that the market prices everything correctly and so it isn’t possible to outperform the market in the long run.
How big is the asset management industry?
Audited and verified annual figures at the end of 2013 indicate that total assets under management of US registered investment companies equalled nearly $17.1 trillion.
The salient features of mutual funds
There are investors who are willing to take on higher risk to generate above-average market returns. For these investors, active funds offer the optimal investment avenue.
Wells Fargo continues to impress with consumer loan growth
Wells Fargo’s largest line of consumer loans is its first family mortgages. Those loans stood at $265.4 billion in 4Q14, a growth of 1.9% compared to 4Q13.
Show it: How mutual funds make money
In return for investing a client’s money, mutual funds charge a fee, generally an annual fee set as a percentage of the client’s assets. This fee is the only source of income for a mutual fund-focused asset manager.
U.S. Bank’s non-performing assets declined in 4Q14
U.S. Bank’s (USB) non-performing assets were $1,808 million at the end of 4Q14. The ratio declined by 11.24%—compared to 4Q13.
Private equity, hedge funds, and other alternative assets
Private equity is capital invested in companies that aren’t listed on stock exchanges. These alternative assets include venture capital.
The many players in alternative asset management
Some players are present across the spectrum of alternative assets, but most alternative asset managers are present only in a particular asset area.
The relative share of the alternative asset management space
Alternative assets account for about 10% of the total global asset management industry that’s valued at $63.9 trillion. Private equity contributes most.
Alternative asset managers open the door to retail investors
Retail investors are more aware about the benefits of alternative assets. In 2014, investments in alternative-focused ETFs increased by nearly 50%.
JPMorgan’s Consumer & Community Banking segment’s results
The Consumer & Community Banking segment provides services to retain customers and communities. The fourth quarter wasn’t good for this segment.
JPMorgan’s market and investor services were hit in the 4Q
In market and investor services, the best performing product was equity markets. Equity markets’ revenue was $1.1 billion. This was a handsome rise of 25% YoY.
A brief overview of U.S. Bank
We’ll provide an overview of U.S. Bank. It’s the fifth largest retail bank in the US—by deposits and assets. At the end of September 2014, it held $391 billion in assets.
Why U.S. Bank’s loan growth showed interesting trends
You need to understand loan categories better in order to see some very interesting trends in U.S. Bank’s loan growth. Its loans are divided into five main categories.
Efficiency ratio improved for U.S. Bank in 4Q14
U.S. Bank led the industry in terms of the bank efficiency ratio. At the end of 4Q14, the sector efficiency ratio was 68.66%.
Wells Fargo’s Tier 1 capital position: One of the best
Wells Fargo’s Tier 1 capital declined in 2014, but it’s not an indicator of weakness. The bank had capital far in excess of regulatory requirements.
Wells Fargo’s nonperforming assets drop: Why that’s significant
Wells Fargo’s nonperforming assets were $15.5 billion for 4Q14, a fall of $739 million from 3Q14. The drop was in nonaccrual loans and foreclosed assets.
Must-know: Traditional banks face challenges
When a borrower isn’t able to pay back the loan, the loan is considered a non-performing asset (or NPA)—since the money for lending came from a depositor, the bank needs a large enough pool of capital to withstand such a shock.
Must-know: Why the FDIC is the second major banking regulator
The Federal Deposit Insurance Corporation (or FDIC) is the second most important banking regulator in the U.S. The FDIC directly examines and supervises more than 4,500 banks and savings banks for operational safety and soundness.
Why the price-to-book value ratio’s the most used valuation
The price-book value ratio is the ratio of the market value of equity to the book value of equity. Price stands for the current market price of a stock. Book value is the total assets minus liabilities, or net worth, which is the accounting measure of shareholders’ equity in the balance sheet.
Borrowing to Invest Does More Harm Than Good
Borrowing to invest is no way to make money, says Warren Buffet in one of his many letters to Berkshire Hathaway investors.
Free Cash Generating Businesses Are Best
Investor Warren Buffett believes that the primary objective of any good business should be to generate lots of free cash.
Management Is of Paramount Importance
Would you trust a thoroughbred to win if it had an average or worse, a poor jockey? No, you wouldn’t. It’s the same thing with the management of a company.
Price Is What You Pay—Value Is What You Get
Will the future growth justify the current price? If the price is much higher, then it’s best to avoid investing.
Long-Term Investing Pays the Best
Most of the money Buffett made in stocks including Wells Fargo & Co. (WFC), Coca-Cola (KO), and IBM (IBM) is the result of long-term investing.
Stocks Beat Bonds over the Long Run By a Big Margin
The majority of investors believe bonds are safer than stocks. The main reason is that bonds pay regular interest.
The Buffett Letters: 10 Commandments to Investors
We all know what a great investor Warren Buffett is. His investing prowess is unmatched. And each one of his letters is packed with words of wisdom.
Why trading assets are an important indicator for banks
Total trading assets at banks stood at $655 billion at the end of 2014. Trading assets have increased by 24 basis points since 2Q14.
Valuation of PNC Bank is close to historical mean
PNC stock was trading at a PBV ratio of 0.75 in November 2012. Since then, the stock has seen a smart move up and trades at a PBV multiple of ~1.08.
PNC Bank’s financial strengths outweigh its weaknesses
PNC Bank has done a good job at reducing its non-interest expenses, but the bank’s efficiency ratio still remains above 60%.
Why loans are the most important earning asset for smaller banks
Loans as assets are less important for larger banks, as large banks tend to have a more diversified asset portfolio.
Why loan assets are gaining importance in the banking sector
In recent years, trading assets had grown in importance, but after the sub-prime crisis, the importance of loan assets increased again.
Why earning assets are an important indicator for the banking sector
The banking sector has shown a trend of increasing earning assets, because banks have focussed on becoming leaner and improving operational efficiency.
Banking asset indicators: Do they make analysis easy?
Banking asset indicators are important because the majority of banking income comes from the assets side of the balance sheet.
Why the auto finance market share needs to be protected
Auto finance is a business where Capital One (COF) grew rapidly. The bank entered the market in 1997. Since then, it has been able to build a sizeable market share.
Analyzing Capital One’s business segments
Capital One (COF) can be understood best by breaking it into different business segments—Credit Card, Consumer Banking, and Commercial Banking.
What are Capital One’s three main subsidiaries?
Capital One is organized into subsidiaries. Capital One’s principal subsidiary is a limited purpose credit card bank. It’s chartered in Virginia.
Capital One’s history: From credit cards to a diversified bank
Capital One’s history is shorter than other banks. In 1994, Signet Financial Corp. spun off its credit card business into a separate subsidiary—Capital One.
Why the composition of banking assets matters
The two main types of banking assets are loans and securities held.
Non-interest expense management can improve at PNC Bank
PNC’s net interest expenses stood at ~$9.5 billion at the end of 2014, $193 million lower than 2013 after curtailing salary and miscellaneous expenses.
PNC Bank loan book carries some risks
PNC Bank’s loan book is skewed toward a few types of loans: commercial and industrial loans and 1–4 Family First Liens, about 44.5% of its total loans.
Does PNC Bank remain a strong long-term play?
With a strong presence in the East, South, and Midwest, PNC Bank offers community banking, wholesale banking, corporate banking, and asset management.
Must-know: Wells Fargo is strongly capitalized for future growth
A bank’s growth can be limited if it doesn’t have enough regulatory capital. If the bank doesn’t have enough capital, it will be forced to dilute its equity to raise capital.
Why Wells Fargo ranks high in overall competitiveness
Cards represent another big area of opportunity for Wells Fargo. Only 36% of its retail banking clients and 20% of its mortgage clients have Wells Fargo cards.
Why Wells Fargo’s strategy is different from other banks
“Strategy” can be defined in many ways. Generally, strategy is a long-term plan. There are two main aspects to strategy—operational level strategy and human resource level strategy.
Abbot Downing: Wells Fargo’s fortune hunters
The bank estimates that there are currently about 10,000 potential clients in the U.S. with more than $50 million of assets available for investment.
Financial advisory services suit Wells Fargo well
Advisory services are an important revenue stream for the bank. They are low-risk, fee-based services that help Wells Fargo leverage its retail network.
Why commercial lending is important to Wells Fargo strategy
The bank’s strategy is to not focus on any particular segment of industry. This helps it mitigate risk because the bank’s earnings and delinquencies are not dependent on any particular sector.
Wells Fargo enjoys cross-selling strength in diversity
Its extensive branch and community networks enable Wells Fargo to maintain a strong position in retail, or consumer loans.
Why large-fund investing isn’t always right in mutuals
The bigger your fund gets, the more difficult investing a meaningful percentage of your assets under management in new and upcoming ideas becomes.
Will Bill Gross’s departure from PIMCO net profits for Janus?
Much of the headline space for the last week covered the legendary bond mutual fund manager Bill Gross leaving Pacific Investment Management Company, LLC, (or PIMCO) to join Janus Capital (JNS).
Wells Fargo has room to grow in the international arena
Being present in many countries helps banks profit from today’s borderless economy. Aside from the U.S., the top three countries where Wells Fargo is present are United Kingdom, Canada, and China.
Why the Wells Fargo US geographical footprint matters
Banks increase their footprints in two main ways: width and depth. Often, a bank’s footprint is a function of its size.
Why Wells Fargo needs to shore up its investment banking business
Success in investment banking requires a bank to understand capital markets and how deals—mergers and acquisitions, raising equity capital, debt syndication—should be structured and executed.
Why qualitative analysis should matter to Wells Fargo investors
Before investing, it’s important to analyze a bank qualitatively, as well as quantitatively. Qualitative analysis is more likely to determine how well a bank will perform over the long-term.
Must-know: Basel III’s shortcomings
Basel III addresses most of Basel II and II.5’s deficiencies. But it still has some shortcomings. Firstly, the increased regulatory capital required under Basel III will increase barriers to enter into the sector.
Basel III is the most stringent and conservative banking regulation
Basel Committee on Banking Supervision came out with Basel III Accord in September 2010. Basel III Accord had a new capital framework. It revised and strengthened the three pillars of Basel II.
Why Basel II.5 corrected Basel II to improve banking regulations
Basel II.5 was essentially a revision of Basel II norms, as the existing norms often failed to correctly address the market risks that banks took on their trading books. Basel II.5’s main aim was to strengthen the capital base, and so the banks’ ability to withstand risk, by increasing banks’ capital requirements.
Why Basel II wasn’t good enough for reducing bank risks
Basel II was a comprehensive regulation that covered major sources of risks for banks. But it had a few major drawbacks. Firstly, it provided incentive to a bank’s management to underestimate credit risk.
Must-know: The current state of banking regulation in the US
Currently, the banking regulations in the U.S. are shaped by the Basel norms. Basel banking norms are global banking norms set by the Basel Committee on Banking Supervision (or BCBS), which is a part of the Bank for International Settlements (or BIS).
Why Basel II’s pillar 3 brought market discipline to banks
Basel II’s third pillar concerns market discipline, and the requirements are related to disclosures of a bank’s market-related investments. According to pillar three, banks were expected to build comprehensive reports on their internal risk management systems.
Why Basel II’s pillar 1 focused on bank capital requirements
The first pillar updated the 1988 solvency ratio. Risk-weighted assets (or RWA) capital is still viewed as the most relevant control ratio, as capital is the main buffer against losses when profits become negative.
Why Basel II was the most radical approach to banking regulations
The Basel Committee on Banking Supervision received feedback from central banks across the world and other stakeholders. Since Basel I’s implementation in 1992, the banking landscape had changed a lot. So there was a need to come up with a new set of regulations.
Must-know: Why capital ratio is an important bank ratio
Capital ratio is also known as capital adequacy ratio or capital-to-risk-weighted assets ratio. Capital ratio is nothing but the ratio of capital a bank has divided by its risk-weighted assets. The capital includes both tier one and tier two capital.
Must-know: Why Basel I wasn’t a good fit for all banks
Although Basel I brought a worldwide standard in regulations, introduced the risk-weighted assets concept, and segregated capital, it had a few deficiencies.
Must-know: Understanding risk-weighted assets in banks
The second most important technical parameter used in banking regulations is risk-weighted assets (or RWA). If you’ve seen bank financial statements, then you might have noticed the “RWA” term there.
Must-know: Why capital in banking is important
Capital is important because it’s that part of an asset which can be used to repay its depositors, customers, and other claimants in case the bank doesn’t have enough liquidity due to losses it suffered in its operations.
Must-know: The different types of banking capital
The most important types of banking capital are common stock (or shareholders’ equity), preferred stock (or preferred equity), revaluation reserve, general provision, and hybrid instrument.
Must-know: The 3 characteristics of bank capital
The first term we need to understand is capital. Capital for a bank is somewhat different from the way we generally understand the word in our day-to-day lives. We understand capital as money. But in a banking sense, it means that and more.
Overview: The basics of banking regulations
Banking regulations aim to ensure that the risks are minimized. If any unforeseen event occurs, then the interests of bank customers are protected. On a wider scale, the regulations also seek to absorb and minimize shock in the economy.
Must-know: The consequences of imprudent risk-taking by banks
We stated earlier that most banks are highly leveraged financial risk-takers. When things go awry, the results can be catastrophic, leading to huge losses or even to a bank closure.
Must-know: A thorough look at defining banking risk
Banking risk can be defined as exposure to the uncertainty of outcome. It’s applicable to full-service banks like JPMorgan (JPM), traditional banks like Wells Fargo (WFC), investment banks like Goldman Sachs (GS) and Morgan Stanley (MS), or any other financials included in an ETF like the Financial Select Sector SPDR Fund (XLF).
Overview: What you need to know about banking risks
Whenever we analyze any banking company, we’re looking at two main variables—the return a bank earns and the amount of risk. To understand any bank, you need to understand these two parameters well.
Must-know: Price-to-book value ratio shortcomings
Nothing is perfect. Although the price-book value ratio method looks robust, it has a few disadvantages that you should avoid.
Why the price-to-book value ratio affects returns on equity
Historical analysis has shown that return on equity has a strong impact on banks’ value creation in the long run. So financials that have high price-book value ratios should also have high returns on equity.
Overview: What makes custodian banks different from other banks?
Custodian banks like a warehouse and store other financial institutions’ and individuals’ assets—they help in keeping financial instruments safe.
Must-know: Challenges in investment banking
When a firm takes on very high leverage and the trade turns out to be a loss, it can wipe out a bank’s entire profits and capital very quickly—during the sub-prime crisis, the collapse of Lehman Brothers—the largest bankruptcy filing in U.S. history—was due to leveraged trading.
Overview: The way traditional banks make money
Generally, the interest charged from those who took the loans is higher than the interest paid to depositors—the difference in the interest earned and interest paid is the interest income that is essentially the money made by the bank from its core operations.