Wells Fargo 2Q numbers - steady as she goes

Wells Fargo reported 2Q numbers (and first half) before the market opened Friday. This is our one and only banking stock, globally in fact. We do of course own Discovery in our local portfolios and that is morphing into a bank, it is not even a secret. Wells Fargo is a company that morphed from being originally a stagecoach (the logo) delivery business to becoming a money transfer business, to one of the biggest banks by assets in the world. By the last read that I could find from the Federal Reserve (banks ranked by consolidated assets, March 2016), only JP Morgan is "bigger". Most of Wells assets, 97 percent of them, are in the USA. 267 odd thousand employees work there, including a little over 15 thousand financial advisors. Wow, that is a LOT of people at over 6000 branches.

The expectations from the group are that rates are going to stay lower for longer. They continue to grow their investment securities portfolio. Total loans outstanding at the end of the period grew to 957 billion Dollars from 888 billion Dollars from the same time last year. Total deposits grew 1 percent from the corresponding quarter and whilst that hardly sounds exciting, it now totals 1.2 trillion Dollars. Wow. That is an abnormally large number and not one that you often hear bandied about.

Why does one want to own this company? First and foremost, they are a handsome dividend payer, with a pretax yield of just over 3 percent, their payout ratio was 62 percent last quarter. And the stock is cheap, far cheaper than the rest of the index historically. The market is telling you that with rates likely to flatline for some time, as a result of lower inflation expectations, that their traditional core driver of earnings is unlikely to grow quickly. Instead the group will concentrate on reducing costs and looking for other avenues of growth, including investment banking. They only have a four percent market share of investment banking in the US, a banking friend of mine suggested that their growth plans are pretty aggressive.

When interest rates do eventually turn tail and head higher, even if they are below long term averages, as a result of low inflation, the company is well geared to an improving US economy. This company is never going to excite anyone, it does act as a proxy for the US economy. Which is stronger than most people suspect. What about fintech and the other disruptors? Many of the banks will of course evolve with the technology, a bank of this size might take a while to evolve. Hang in there, Joe Consumer still has some way to go with regards to evolution from even the humble check book. We continue to accumulate for clients where they are underweight.