Why Does Everyone Hate Bank of America but Love Wells Fargo?

Wells Fargo has been broadly more accepted than Bank of America -- and there's one reason that is true.

As the American economy has recovered from the financial crisis that ravaged the economy, in the eyes of both individuals and investors, Wells Fargo (WFC -0.50%) has had a distinct advantage over competitor and peer Bank of America (BAC -0.13%). Consider that the Reputation Institute recently showed that Bank of America barely trailed Wells Fargo in the ratings from its customers, yet Wells has one of the highest ratings from non-customers: 

Source: Reputation Institute.

Despite that fact, its customer rating is nearly equal to Bank of America's, and it has a non-customer rating that it almost 45% higher. The reason for that escapes first glance. 

The performance
Yet its esteemed reputation isn't just in the eyes of the public, but among the investing community as well. Over the past five years, you can see Wells Fargo has been a resounding winner. $1,000 invested in Wells Fargo in December of 2008 would be worth nearly $1,650 today, and the same investment in Bank of America would be worth only $1,100, as shown in the chart below:

While both of those are still dramatically trailing the S&P 500 total return (up almost 120% over that same time period), the reality is that if you narrow that time frame to from December of 2010 until today, the total return of Wells Fargo stands at 52%, the S&P at 51% and Bank of America at 15%.

And it isn't solely Bank of America that Wells Fargo bests, but also other peers like Citigroup and JPMorgan Chase:

While JPMorgan takes the title as the five-year banking winner, if you broaden the scope to 10 years, Wells Fargo has a total return of 95% compared to JPMorgan Chase's 101% -- so the gap isn't as wide as first glance may indicate.

So in all of this, the natural question becomes, what is Wells Fargo doing that has made it so much more successful than the other banks, both from an investing and public perception angle?

The reality
Curiously, although Wells Fargo's reputation greatly exceeds that of all three of its megabank peers, the reality is, the underlying data doesn't exactly support that notion.

According to the latest data from the American Customer Satisfaction Index, while Wells Fargo bests Bank of America with a rating of 72 versus 69, it trails both JPMorgan Chase (76) and Citigroup (74). In the 11 regions measured in the J.D. Power Banking Retail Satisfaction Index, the bank is considered among "The Rest" (the worst ranking) four times, and "About Average" the other seven. Bank of America's breakdown is six and five.

As it relates to foreclosures, Bloomberg reports that under the Home Affordable Modification Program (HAMP), Bank of America foreclosed on 33% of customers, but Wells Fargo stood at 27%. JPMorgan Chase and Citigroup each came in at 20%, and the industry average was 22%.

And it isn't even as though Wells Fargo has been immune to the settlements that have plagued the biggest banks lately. Although Bank of America tips the scales at $43.9 billion in settlements, and JPMorgan Chase sits at $26.4 billion, but Wells Fargo comes in third as it has doled out $9.5 billion. By comparison, Citigroup has only paid out $4.7 billion.

The reality
So what exactly is Wells Fargo doing? Well, first and foremost, although it seemingly leaves consumers in a bit of a lurch at times, it has delivered resounding growth in its profitability to its shareholders. Consider that it has delivered a new record net income each of the last 10 quarters. This steady rise in net income is dramatically different than the wild fluctuations of its peers:

Source: Company Investor Relations.

There are a myriad factors that all contribute to this, but I would argue that one principal reasons is the simple fact that Wells Fargo has been a dramatically safer bank. Consider its allowance for loan losses as a percent of total loans compared to its peers:

Source: Company Investor Relations.

As you can see, this relative safety provided by an investment in Wells Fargo is thanks in large part to the relative safety maintained by the bank itself. This has undoubtedly allowed Wells Fargo to make it through the financial crisis and emerge in a much better position than its peers. This has allowed it to be a winning company for investors, but what about consumers and the public?

The reason
Thinking back to the previously mentioned statistics, the reality is, Wells Fargo hasn't been the best bank for all intents and purposes, but what it also hasn't been is the worst. And being the worst at anything grabs headlines.

JPMorgan Chase has had the largest single settlement value and the London Whale fiasco, Citigroup has had monumental losses, and its stock is still dramatically down relative to its pre-crisis levels, and Bank of America has well, been Bank of America.

Wells Fargo has not been the poster child for good things, but it simply hasn't been the worst of the megabanks at anything either. And in turning the popular Ricky Bobby quote around, seemingly in the case of the biggest banks in our country, if you're not last, you're first. And that has made Wells Fargo better than Bank of America.