1 Great Bank Stock for the Beginning Investor

Over the years, I've been informally taught to fear banks as investments. "Their balance sheets are too hard to read." "They're too opaque." My sister, a bank vice president with an MBA, even told me once to "steer very clear of them." But while this advice holds true for many banks, especially the ones on Wall Street, it doesn't hold true for all of them.

One of those exceptions is Wells Fargo (NYSE: WFC  ) , a big bank that famously kept its nose clean during the financial crisis and just turned in rival-crushing fourth-quarter results. Let's take a step-by-step look at the 160-year-old banking stalwart and see just what makes it such a great investment for beginners.

Banking 101
First, some basics. In one form or another, banks have been around for millennia, and have traditionally made money in a very boring but dependable manner:

  1. Take in deposits.
  2. Lend the money out at a higher interest rate.
  3. Pay the depositors a lower interest rate.
  4. Pocket the difference between the two rates as profit.

Investment banking, as it evolved in the late 20th century, changed all this. Banks began making very exciting but risky investments, investments which could quickly lead to the bank's collapse if things didn't work out as planned. This is a large part of what happened in the 2008 financial crisis, with the now-bankrupt Lehman Brothers being a primary example.

Making money the old-fashioned way
Wells Fargo still makes money the old-fashioned way. It does have an investment arm, but to quote the bank's chief financial officer, Tim Sloan: "We like the investment banking business but we also like the fact that on a relative basis we don't have a specific business that's the majority driver." As such, Wells Fargo avoided much of the mess that engulfed the banking industry in 2008 (the effects of which are still being felt today).

In fact, with profits down across the investment banking sector right now, Wells Fargo's smaller investment banking arm meant smaller losses from that division in the fourth quarter, especially versus rival Citigroup (NYSE: C  ) , which has a much bigger investment arm. Wells Fargo's net income for fourth-quarter 2011 was $4.1 billion, up from $3.4 billion in the fourth quarter 2010 -- a big jump of 20%.

Citigroup's fourth-quarter net income plunged 11%. The drop was due in part to a $163 million loss from the bank's investment arm, versus a profit of $212 million last year. Underlining just how tough things are in the investment banking world, fourth-quarter net income for JP Morgan Chase (NYSE: JPM  ) dropped 16.3% year over year, with the mighty Goldman Sachs' (NYSE: GS  ) net income plummeting a spectacular 57.6%.

Going global the old-fashioned way
Wells Fargo is the country's largest bank by market capitalization, and has earned its steady-Eddie reputation while doing most of its business in the U.S. But that's about to change -- at least to some degree. As its U.S. customers expand their business around the world, Wells Fargo plans on following them by moving into 20 foreign markets, including Germany, Hong Kong, the U.K., Japan, France, and China.

Expanding more globally is a good move for the big U.S.-focused bank, especially the way in which it's going about it -- that is, cautiously and thoughtfully. And the physical logistics of the move itself will be helped by the fact that Wells Fargo already has the office space, acquired when it took over Wachovia bank during the 2008 financial crisis.

The seal of approval
And, although I hesitate to mention it, another significant bright spot worth mentioning about Wells Fargo is that the bank is a favorite investment of Warren Buffett. Just last month, Buffett bought 46.6 million shares, bringing Berkshire Hathaway's (NYSE: BRK-B  ) total holdings in the bank to 408 million shares, and accounting for 7.7% of Berkshire's total holdings.

They don't call Warren Buffett the Sage of Omaha for nothing. He's an extraordinarily careful, thoughtful investor. That said, you should never invest in a company just because someone else does, even if that someone else is Warren Buffett. But this 46.6 million share purchase is somewhat a seal of approval for Wells Fargo: It's not a deal breaker if it's not there, but it sure is nice to have.

Wells Fargo: One of the good guys
I hope you feel a little better about banks as investments now. They're not all shadowy, black holes. Sure, steady, profitably boring, and transparent -- the way all banks used to be -- wins the race in banking and investing -- and that's a formula Wells Fargo has down cold.

If this primer on banks has left you wanting to learn more, read about some more bank stocks The Motley Fool is very bullish on in this special free report: "The Stocks Only The Smartest Investors Are Buying." Download your copy while it's still available by simply clicking here now.

Fool contributor John Grgurich is ready to go and buy some shares of Wells Fargo himself right now, but he currently owns no shares of it nor of any other companies mentioned in this column. Follow John on Twitter: @TMFGrgurich. Leave comments about today's column below. The Motley Fool owns shares of Berkshire Hathaway, JPMorgan Chase, and Citigroup. The Fool owns shares of and has created a covered strangle position in Wells Fargo. Motley Fool newsletter services have recommended buying shares of Berkshire Hathaway and Goldman Sachs. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a perfectly scintillating disclosure policy .


Read/Post Comments (24) | Recommend This Article (62)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 09, 2012, at 5:25 PM, colleran wrote:

    My only question is why is the dividend so small. Is that normal for WFC?

  • Report this Comment On March 09, 2012, at 5:57 PM, italianceltic wrote:

    The "Good Guys?" I harken back to 2009 when Wells Fargo demanded an application fee of close to $800.00 for a loan they knew they would never under write. Maybe I should have known that the appraisal of the investment property would come in some 100K shy, but Wells Fargo definitely knew what they were doing fleecing home owners and investors. Never the less, long term banks will be a great investment.

  • Report this Comment On March 09, 2012, at 7:20 PM, woolibulli wrote:

    They are getting some negative attention with their new checking charges.

  • Report this Comment On March 09, 2012, at 8:00 PM, cackywon wrote:

    Actually Mr. Grgurich is wrong about how long WFC has been in business. Wells has been around since 1852 in CA. During the gold rush its stagecoaches were a major mode of transportation between cities and it's vaults stored much of CA's gold in one form or another. At one time Wells Fargo also owned the American Express Co. but had to divest it for some reason. In teh 60's Wells merged with teh American Trust Co. and went from about 25 offices to over 100 in CA.

  • Report this Comment On March 09, 2012, at 10:07 PM, xetn wrote:

    Oh, as long as Buffett approves, its a good investment?

    Based on that, we don't need no stinking due diligence.

    All banks have a pass as to approved general accounting principles. (Mark to market,etc.)

    I spent 15 years in banking and I would not (never) invest in any bank.

  • Report this Comment On March 10, 2012, at 8:50 AM, jtmonrow wrote:

    The author neglects to mention that all of the "banks" speculation and criminality was enabled by Clinton putting the final death stroke to the Glass–Steagall Act.

  • Report this Comment On March 10, 2012, at 11:27 AM, Lucaskasan wrote:

    Old-fashioned Banking 101 has a couple of assumptions that even WFC has violated. They do lend out depositors' money at a higher rate than the "rent" they pay to use someone else's property to make money. Problem is the rent or interest they pay is practically zero. All banks should pay at least the rate of inflation on deposits in order to merely preserve the value of the depositors' money. If the depositor locks up funds, like in a CD, then they should pay more than the rate of inflation commiserate with amount and term. And depositors should not have to pay maintenance fees for the privilege of losing value. Nor should depositors have to lock up a certain minimum amount or play other games to avoid the bleeding.

    Make this point to any bank manager, and they will argue that banks are in the business of making money. Right, but that does not mean that depositors (even and especially little ones) should be in the business of losing money. Banks should pay fair rent for the use of depositors' property. The minimum should be at least the rate of inflation, regardless of what the Fed does. Savers should never be punished. Now that is something for the 99% to occupy about.

  • Report this Comment On March 10, 2012, at 11:53 AM, 1wayout wrote:

    I agree with Lucaskasan. If a bank wants to "rent" my property (cash) and then sub-lease that property to someone else for a profit, then the bank should at least pay me the cost of owning the property. Otherwise, I have no incentive to rent the property to the bank. Essentially, I have a smaller loss if I sleep on the cash rather than put it in a bank at .05% yield plus $$ bank fees.

  • Report this Comment On March 10, 2012, at 12:24 PM, akaluna wrote:

    The readers who are making critical remarks about fees and charges including paying practically no interest on deposits are making the exact point of the article John G wrote. Wells is making money from all of this putting it at the top of consideration in looking at banks as an investment.

  • Report this Comment On March 10, 2012, at 12:58 PM, mikecart1 wrote:

    I'd rather be in BAC or C if you are looking for stock potential. WFC is a conservative bank stock which is ok if you don't want to lose a lot of money, but you won't make a lot either. BAC and C have the potential to double from their current prices within the next 5 years. That is 20% annual returns.

  • Report this Comment On March 10, 2012, at 3:42 PM, jm7700229 wrote:

    Sometimes I'm simply amazed at how many people who can afford a computer can't read. And why are there people on an investment site if they oppose capitalism?

  • Report this Comment On March 11, 2012, at 10:24 PM, closeups wrote:

    I think everyone should stop complaining and switch to Credit Unions. You will get better rates and low fees in most of the Credit Unions. Just make sure you have CUs that is expanding and not limiting the members too restrictively.

    Most CUs does not Checking-Fees. Pays better than 0.05% on checking account and obviously pays better interest in saving A/C.

  • Report this Comment On March 12, 2012, at 10:02 AM, XMFGrgurich wrote:

    Correction: a sharp Fool reader let me know that Wells Fargo is actually 160 years old, not 80. It was founded in 1852, per the company website. Cheers.

  • Report this Comment On March 13, 2012, at 12:00 AM, vostro wrote:

    I would have great difficulty investing in a company that has given my family and friends such poor service!

  • Report this Comment On March 13, 2012, at 9:37 AM, XMFGrgurich wrote:

    First, thanks to everyone for checking in and keeping the conversation thoughtful and civil.

    Yes, Wells Fargo is 160 years old, not 80. My mistake.

    And I have heard some negative publicity re fees, some from my sister, a WFC customer. If you look at the banking sector as a whole, though, and look at what many did during the crisis, the fee issues are small, but still worth complaining to WFC about if you're a customer.

    Yes, pulling down Glass-Steagall was a big mistake. It did lead directly to many of the abuses that ended up happening.

    Re the minimum depositor interest rate at least matching inflation, I agree that would be nice, but should that be mandated? Also, at least right now, inflation is essentially zero.

    And I didn't say to buy the stock because Buffet did. I said it's icing on the cake, but due diligence is always in order and takes priority.

    Cheers all.

    John

  • Report this Comment On March 14, 2012, at 1:07 PM, nickjob wrote:

    JP Morgan's 4th qtr was down! No wonder they are resorting to stealing customer money!

  • Report this Comment On March 15, 2012, at 11:48 PM, wrongsideup wrote:

    Just left Wells Fargo, BAC is where I'm placing my stock money, Short term!

    Buffet put his money into GE, I followed suit, and it has been a bust. Buffet is living on past reputation, he has lost his edge.

  • Report this Comment On March 16, 2012, at 12:07 PM, barnett1959 wrote:

    The comment by jtmonrow "Clinton putting the final death stroke to the Glass–Steagall Act. claiming the author should have brought this issue upis way off base. You cannot legislate morality, regulate greed or ignorance by the so called leaders of this Corporations. There is no law that can be written to prevent these type of issues from happening.

    Lastly Presidents do not write laws they sign them. Congress created this law but this law or any law had nothing to do with the collapse.

  • Report this Comment On March 16, 2012, at 4:36 PM, kbeck02 wrote:

    Reply to barnett1959:

    There was a "Great Depression" (1929). Glass-Steagall (The Banking Act of 1933) was passed by Congress and signed by the President to create a separation between Wall Street investment banks and depository banks. The Gramm-Leach-Bliley Act, which repealed Glass Steagall, was passed by the 106th Congress and signed by Bill Clinton in 1999. Glass-Steagall was quite effective until then.

    Presidents have the option of NOT signing legislation presented to them by the Congress.

    It is OK to have opinions, please try to base them on facts, knowledge of how systems work, and some knowledge of history.

    "Those who cannot remember the past are condemned to repeat it."

    George Santayana

  • Report this Comment On March 16, 2012, at 9:56 PM, gandalfjrs wrote:

    A note from personal experience on the customer side. When interest rates plunged I found myself with a mortage paying 6.75% and a second paying 7.9%. My credit is flawless and this bank did lower my first mortgage rate to 4.125%. One day I get a call from the bank and they suggest that they can lower my second to 4.5% so I agreed to apply. I'd like to say that my payments were drafted each month and there had never been a hickup in the pmts. I got a letter saying that my second had been denied on the basis that I didn't have enough income! This was on a loan that was already made and no problems with payment of ~5 yrs for a track record. Obviously I had enough income to support these payments. It disturbed me enough to pay off my second and first mortgage with them and close my other accounts. I'll never do business with them again. From an investment standpoint, I guess I'd say they are a good investment, now. If they continue to treat customers in this manner, it will show up in their performance one day. I'm sure they were shocked that I had the capital to payoff my loans immediately.

  • Report this Comment On March 16, 2012, at 10:07 PM, whyaduck1128 wrote:

    Help me save a little time here. Is every article you present little more than a shill for MF's "latest and of course greatest" $ervice?

  • Report this Comment On March 17, 2012, at 8:44 PM, eightzeroes wrote:

    Oh geez, WFMC stock has been in sideways mode for years (sans the crash) and is once again testing resistance. I'll wait until it falls to $25 bucks or breaks resistance.

    What Buffet does is of no concern to me. His deals and his logic don't apply to my money.

  • Report this Comment On March 17, 2012, at 8:44 PM, eightzeroes wrote:

    Whoops WFC not WFMC. Typo.

  • Report this Comment On April 05, 2012, at 1:54 PM, snapperreef wrote:

    I'm with xetn. After trying IBOC I don't want to try investing in a bank. I'm just not good enough nor smart enough to get the necessary information and to properly analyze it if I had it.

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