Friday, July 12, 2013

Wells Fargo's 2nd Quarter 2013 Results

Some highlights from Wells Fargo's (WFC) latest quarterly earnings:

- The bank earned $ 5.52 billion in the second quarter, up from $ 4.62 billion. Revenue was $ 21.4 billion, up from $ 21.3 billion. Quarterly per share profit increased 20 percent in second quarter to 98 cents per common share from 82 cents per common share in the same period a year earlier.

- Net interest margin decreased to 3.46 percent from 3.91 percent. Not really surprising considering interest rate trends this past year or so. Though net interest margin is lower, the bank continues to have a meaningful advantage compared to other big banks.

- Return on equity was 14.02 percent, up from 12.86 percent a year earlier.

- Total average deposits is now at $ 1 trillion, up 9 percent from a year ago.

- Net loan charge-offs were $ 1.2 billion in the second quarter of 2013 compared to $ 2.2 billion in the second quarter of 2012.

- Average loans grew to $ 800 billion from $ 768 billion a year ago.

From the Wells Fargo quarterly release:

"Our results reflected the strength of our diversified business model. Compared with the prior quarter, we grew loans, deposits, and net interest income, and both our efficiency ratio and credit quality improved." - Chairman and CEO John Stumpf

The FDIC is proposing a higher leverage ratio -- a more strict standard than what's currently under consideration in Basel III -- for larger bank holding companies (BHCs).
(Covered in this previous post.)

Well, this Bloomberg article from last month had suggested that a 6 percent leverage ratio was being considered and pointed out that:

Among the biggest U.S. banks, only San Francisco-based Wells Fargo & Co. (WFC) would exceed the 6 percent threshold being considered...

They're currently proposing a 5 percent* leverage ratio for the BHCs.*

In the long run, a more strict leverage requirement -- whether it ends up being 5 percent, 6 percent, or even higher -- would seem to be a very good thing.
(Even if a challenge for certain banks in the shorter run.)

The 3 percent level proposed under Basel III does seem rather meager. Well, at least they appear inadequate in the context of the kind of losses that can occur during a serious financial crisis. After watching the kind of financial destabilization that occurred not long ago, and the resulting hugely negative economic impact, this warrants serious consideration.

Not all of what happened was the result of excessive leverage -- both visible and hidden -- but much of it certainly was.

The Basel III proposal belatedly introduces the concept of a leverage ratio but calls for it to be only 3 percent, an amount already shown to be insufficient to absorb sizable financial losses in a crisis. It is wrong to suggest to the public that, with so little capital, these largest firms could survive without public support should they encounter any significant economic reversals. - Thomas Hoenig, vice chairman, FDIC in this April 2013 speech

In any case, though very important, it's not just capital levels that matters. It's also the quality of a bank's core economics. That's driven by not only cheap stable funding, but also whether they put funds generally to intelligent use and in combination with other services that customers value.
(Services that help a customer manage their capital and liquidity needs, the management of risks, etc.)

That requires, among other things, the right kind of culture be in place.

Difficult to quantify but extremely important.

"And I tell you, sure as I am sitting here, that if banking institutions are protected by the taxpayer and they are given free rein to speculate, I may not live long enough to see the crisis, but my soul is going to come back and haunt you." - Paul Volcker speaking to the Senate Banking Committee

It also means that speculation with guaranteed money needs to be severely limited.

Adam

Long position in WFC established at much lower than recent prices

Basically, it appears they'd like to see a 5 percent leverage ratio for the larger BHCs, and a 6 percent ratio for any insured depository institution that's a subsidiary of these larger BHCs. The Office of the Comptroller of the Currency (OCC), Federal Deposit Insurance Corporation (FDIC), and the Federal Reserve Board (FRB) have proposed doubling the leverage ratio on an insured depository institution owned by a BHC. So these "agencies are proposing to establish a 'well capitalized' threshold of 6 percent for the supplementary leverage ratio for any insured depository institution that is a subsidiary of a covered BHC..."

In addition, they are also proposing that "a covered bank holding company would be subject to a supplementary leverage ratio buffer of 2 percent, above the 3 percent minimum requirement for banking organizations using the advanced approaches under the new capital rule."
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