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Wells Fargo FY numbers - earnings down, revenue up

Wells Fargo reported FY numbers, equally also for the fourth quarter. The bank has been rocked by scandals last year, fake accounts opened on behalf of unwitting customers. It is a massive institution, 1 in 3 households in the US have a banking relationship with Wells Fargo. The company has been in the same headquarters since 1852, one of the few businesses to have the same name, the same headquarters for over 150 years. Of course they were supposed to be immune to scandals, this is one of Berkshire's largest holdings, and that investment house has a pretty long and proud record.

The company has since corrected the incentives programs, where ordinary employees were subjected to very strict daily "solutions", meeting targets. For the 5300 odd employees fired for signing customers up for fake accounts over the years, the bank was slapped with a fine of 185 million Dollars. Whilst the amount of money actually lost by the customers is small, the average amount per fake account was 1.14 Dollars per customer. It hardly made anyone anything, it lost the customers a few beans, it made the sales agents look better than they really were.

Fraud is fraud, no matter whether it is three beans or the whole beanstalk, With politicians keen to make an example of the company and broader sector, executive compensation has once again come under the spotlight. The long and the short of it all was that CEO John Stumpf fell on his sword (reluctantly), Tim Sloan assumed the role of CEO and the team said "sorry" and have tried to stick this behind them. The reputational risk is something that hangs around for probably half a generation (my best guess).

Notwithstanding all of the negative headlines, the negative news, the being hauled in front of angry (understandably) politicians, the company has managed an OK 2016. Diluted EPS clocked 3.99 Dollars, lower than the 2015 number of 4.12 Dollars. Revenues did increase three percent to 88.3 billion Dollars, net income was 21.9 billion Dollars. Size. Huge. Year end deposits topped 1.3 trillion Dollars, up 6 percent. Total loans as at the end of 2016 were 967.6 billion Dollars, up 6 percent for the year. Net interest income increased 7 percent. The numbers are OK, they really are not that bad in an environment that is just starting to see liftoff from ZIRP, Zero Interest Rate Policy.

There are two things that make this investment compelling. For starters, there is the ability to scale the technology side of the business. They have around 8400 branches, and plan to close 200 odd this year and 200 plus next year, reducing their branch infrastructure (and associated costs) by five percent immediately. What excites me more however, is that the bank is the biggest lender to both the small and medium sized businesses in the US. And small business confidence has just reached a 12 year high. The whole idea that the affordable care act may be repealed in part is a win for corporate America, if not a win for broader society. That is unfortunately the way that democracy and capitalism work, if you find yourself on the wrong end of the stick. Equally, with less of a regulatory burden (seemingly), the business may be well placed, their peers too.


It is cheap, with these earnings the business just got more expensive, an unusual event! The anxiety around the oil and gas loan portfolio has abated somewhat as the recovery in energy prices has taken hold. The dividend is likely to be hiked in the coming years as rates rise, marginally. I suspect that confidence will be restored in the brand, and it will become a hazy memory. As luck would have it, Paul reviewed the investment on Hot Stocks last evening, with the same conclusion. Watch it here, Hot Stocks talking Wells Fargo. With a yield underpin of 2.75 percent, I suspect that the stock has found a new floor. We continue to hold and see the stock higher since Trump surprised at the elections.


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