Wells Fargo 1Q numbers - earnings flat

Wells Fargo reported numbers last week. At the same time, Berkshire, the biggest shareholder, sold down shares to below 10 percent. Reason being is in part that the shares in issue have reduced, as a result of buybacks from the company. Fewer Wells shares in issue means higher holding by Berkshire, as they are not a seller. Regulations then forced Berkshire to sell down its position. The numbers themselves were OK. The company of course has been in the news for all the wrong reasons, recent executive clawbacks of shares are a step in the right direction of normalising the behaviour of the staffers in question. Of course the stink associated with the scandal meant that the chief was axed and the board moved swiftly to restore credibility.

To the numbers for Q1 2017! Net income was flat at 5.5 billion Dollars on revenues of 22 billion, relatively light for what the market expected. Earnings per share registered a Dollar exactly, the market consensus was three cents lower than that. Lean in here, just to hear an amazing number. Total average deposits clocked 1.3 trillion Dollars (in a low rate environment), up 7 percent relative to the first quarter of 2016. Total loans ticked up 4 percent to 958 billion Dollars, again, an eye popping number.

Credit quality improved, provisioning expenses were lower by 44 percent. Good news! Consumer balance sheet repair continues. What is more interesting is that online and secure sessions (what we know as internet banking) continues to gain momentum at the expense of the branch visits. I am sure that when people eventually come around to being less interested in the physical interactions, and more at peace with the online transaction, that costs can be further curtailed. Branch interactions are actually up from Feb to March, down heavily year-on-year though.

The real question arises, why own this company? And is the stock fairly priced at these current levels? Firstly, the USA is where animal spirits are encouraged. The USA is a place where capitalism and risk taking is encouraged, and has been for the last 250 odd years. The champagne socialists will tell you otherwise, the real hardcore two-piece short sleeve Mao suit wearing socialists will believe otherwise. The truth is, more people have been lifted out of poverty by forward economic momentum of the capitalistic kind than at any other point in humanity. The US continues to have a growing population, forward momentum in terms of household formation, and a growing economy. Wells Fargo is a good proxy for housing in the US, it is a good proxy for the economy in the US. Until recently, they were a good proxy for the gold standard in risk free banking ownership (of the stock).

What about the price? The stock fell in response to the earnings. Recently the chair and the CEO bought shares in the business after the price fell, around 5 million Dollars worth. I suppose that is as good an endorsement as it gets. This is Stephen Sanger (chair) and new CEO, Timothy (Tim) Sloan. The stock trades on 13x historic earnings, with a pre-tax dividend yield of close to 2.9 percent and around 12.2x forward. It is hardly expensive, yet lower rates may well mean that interest earned may be lower than anticipated. i.e. the idea that the Fed won't raise rates as much as anticipated. We own the stock as a stable part of the portfolio, reliable, yet a proxy for the US economy. We continue to be patient, the share price should expand later into the year as the US economy improves, and interest rates rise.