Monday, May 4, 2009

Wells Fargo

Wells Fargo will apparently be required to raise some capital.

While Wells regulatory capital ratios were fine before Wachovia, the size and scope of that troubled bank reduced the regulatory capital ratios of the combined Wells-Wachovia to the low end.

Wells is a very good banking franchise in my view. The franchise value will become more obvious over time as the superior economics of the Wells model kicks into gear.

I think Warren Buffett's view is the correct one but regulators don't look at the economics the same way he does. Buffett added the following:

"I can tell you that US Bancorp and Wells Fargo are extremely strong banks," Buffett said Monday in an interview with CNBC. "They have terrific earning power, and earning power is enormously important in what happens to a business in the future. And you couldn't have two better banks virtually positioned than those two for future earnings."

But Buffett said the stress test results might not fully reflect the banks' strength. A company with low production costs but lots of debt might survive a recession but flunk the test, while a company with high production costs and no debt might ace the test but could not survive price declines, he said.

Buffett said Wells Fargo has the lowest cost of production of any of the big banks.

In any case, the impact of dilution should not end up being significant so the long-term investment thesis remains roughly the same.


Long position in U.S. Bancorp and Wells Fargo
This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.