This Is Wells Fargo’s Most Valuable Asset

Believe it or not, Wells Fargo's most valuable asset has nothing to do with home loans. Instead, it lies in its massive portfolio of demand deposits.

Apr 2, 2014 at 7:00AM


Let me tell you something about Wells Fargo (NYSE:WFC) that you probably don't know. While the California-based bank has a lot of things going in its favor, its single most valuable asset is its deposit franchise.

The value of deposits is easy to overlook. Unlike loans, they don't produce income. They aren't sexy and limitlessly profitable as investment banking is purported to be. They don't even have the cache of an otherwise boring wealth management operation. But these things shouldn't fool you.

The vast majority of banks exist to do one thing: arbitrage interest rates. They borrow money cheaply and lend it out dearly. The difference between the former "cost of funds" and the latter "yield on earning assets" is the primary profit engine of all but a select few of America's largest banks.


This is the reason deposits are so valuable, as they're far and away the cheapest source of funds a bank has access to. Take a look at the table on the left, which compares the costs that a typical bank faces for various types of financing.

At first glance, the difference between the rate on interest-bearing deposits and long-term debt might not seem like much. After all, it's only a little more than two percentage points.

But this seemingly insignificant gap takes on new meaning when you consider that a bank like Wells Fargo borrows $1.35 trillion to fund its massive portfolio of assets. At multiples like this, the difference between an interest rate of 2.58% and a rate of 0.16% adds up to $32.6 billion in annual interest expense.

With this in mind, it should be obvious why demand deposits like checking accounts are particularly valuable, as they're effectively free -- that is, excluding the not insignificant costs associated with maintaining and servicing the underlying accounts.

This is the reason that Wells Fargo's deposit franchise is arguably its most valuable asset.


As you can see, Wells Fargo is unmatched among the nation's largest banks in terms of its portfolio of demand deposits. Although JPMorgan Chase (NYSE:JPM) and Bank of America (NYSE:BAC) each have more noninterest-bearing deposits in aggregate, few other banks have access to such a large proportion of essentially free money.

On top of this, we haven't even begun to experience the true value that deposits like these bring to the table. This will become apparent only after the Federal Reserve increases the benchmark Fed Funds Rate, which will boost the yield on Wells Fargo's assets more than it will ratchet up the bank's borrowing costs. The net result will be higher profits and thus presumably larger dividends and share buybacks.

The takeaway for investors is this: Assuming Wells Fargo's management doesn't do something uncharacteristically irresponsible over the next few years, it seems safe to assume that the nation's fourth largest bank by assets will continue growing revenue and delivering phenomenal profits.

Big banking's little $20.8 trillion secret
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John Maxfield owns shares of Bank of America. The Motley Fool recommends Bank of America and Wells Fargo. The Motley Fool owns shares of Bank of America, JPMorgan Chase, and Wells Fargo. 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 disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't 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 disclosure policy.

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