There's little doubt that Wells Fargo (NYSE: WFC ) is one of the best run banks in the country. And there's also little doubt that its shareholders have been well compensated for their investment in the nation's fourth biggest bank by assets.
According to an analysis by M&T Bank (NYSE: MTB ) , a regional lender operating in the Northeast U.S., shares of Wells Fargo have achieved a compound annual growth rate of 12.5% since 1983. Over the last 30 years, in other words, a $1,000 investment in Wells Fargo would today be worth more than $34,000, making it the fifth-most lucrative bank stock over that time period (click here for a list of the other four).
But why has Wells Fargo been able to achieve this while so many of its peers have come up short? The answer can be found in the table below, which presents Wells Fargo's return on equity followed by the five main levers that it can pull on to influence profitability.
Aside from its superior return on equity, there are two numbers that go a long way toward explaining Wells Fargo's success.
The first is the amount of money it collects from fee income. As you can see, a full 51% of its net revenue before loan losses comes from noninterest income -- that is, service fees on deposit accounts, credit cards, mortgage applications, etc. Having an alternative channel of income besides simply net interest income makes it significantly easier for a lender to survive tight interest rate environments like the one we're in now.
Indeed, it's no coincidence that the banks with the lowest fee income contribution also have some of the lowest returns on equity. Take People's United Financial (NASDAQ: PBCT ) as an example. It derives only 27% of its income from fees and has an anemic ROE of 4.8% over the last 12 months. The same is true at First Niagara Financial (NASDAQ: FNFG ) , which gets only 26% of its income from fee-based sources and notches a 5.3% ROE.
Indeed, one could even go so far as to say that the absence of fee income was a principal reason that Hudson City Bancorp (NASDAQ: HCBK ) , a regional lender based in and around New York, was effectively forced to put itself up for sale to the M&T Bank last year. When interest rates plummeted following the financial crisis, it didn't have the means to offset the precipitous decline in revenue while M&T did.
The second number relates to Wells Fargo's expense management. Like the saying "a penny saved is a penny earned," it doesn't matter how much revenue a bank generates if it spends all of it on operating expenses. The typical benchmark most banks aim for this in regard is 60%. As the table shows, the typical bank comes up short, with a median among the 15 banks examined of 65%. Wells Fargo, by comparison, handily beats both, with an efficiency ratio of 58%.
As you can see, what's perhaps most surprising about the origins of Wells Fargo's success is just how mundane they are.
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