I'm confused. I'm looking at the headlines of other articles talking about Wells Fargo's
Hm. I actually thought the quarter was pretty decent. Let me explain.
A step above?
Nearly every large investment bank has reported stunning multibillion-dollar charge-offs, and the stock market barely yawned when Citigroup
However, Wells Fargo's total credit charge-offs for the quarter were $892 million, or about 1% of loans annualized. That's a step up from the $720 million charge-off in the last quarter; net income rose only 4% year over year, but we're talking about the worst credit environment since Russia defaulted on its debt nearly 10 years ago. In light of the difficult environment, it seems Wells Fargo performed admirably.
Thou shalt not...
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To continue, Wells Fargo doesn't do structured investment vehicles (SIVs), which are causing a lot of problems at other banks, and doesn't originate interest-only, stated income, option ARMs, or negative amortizing home loans.
One has to ask, what enabled Wells Fargo to stay so disciplined? After all, who wants to originate risky loans if they can originate less-risky loans just as profitably? The problem is, not all banks are created equal.
Wells Fargo has established meaningful relationships with its customers. For example, the average wholesale and middle market customer had a whopping average of 6.1 and 7.4 products, respectively, with Wells Fargo.
This is important because it lets banks know much more about their customers (they can see how much is in a banking account, a customer's bill payment history, etc). Wells Fargo's experience in home equity loans demonstrates this point.
Although correspondent home equity loans (where Wells Fargo purchases loans originated by third parties) only accounted for 7% of the total home equity loans, they accounted for 25% of the losses.
Thus, Wells Fargo's ability to originate a large percentage of its own loans and often to its own depositors represents a tremendous competitive advantage. In fact, Wells Fargo did very well in almost every category. Wholesale banking, asset-based lending, commercial real estate, and the mutual fund business all grew by double digits in the past quarter.
However, much of this growth was largely overshadowed by the increased credit losses. As Wells Fargo continues to tighten its underwriting guidelines (it exited the nonprime correspondent and wholesale channels in the past two quarters), its results should exhibit a lot of positive operating leverage and hopefully reward shareholders.