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Wells Fargo Doth Protest Too Much

John Maxfield
October 16, 2013

Source: The Motley Fool

Statements by corporate executives -- even the absolute best in their respective fields -- should be taken with a grain of salt. At the very least, you should trust but verify.

I was reminded of this when reading through the material that Wells Fargo (NYSE: WFC) distributed for its third-quarter earnings release.

To be clear, the California-based bank is one of the best in the business. And it's led by some of the most talented men and women in the financial world.

But that doesn't mean they aren't capable of a little smoke and mirrors -- albeit of the most innocent variety compared to many of their contemporaries at other banks.

What I'm referring to is its executives' repeated references to the bank's diversified business model -- as I've discussed before, this is something that's very much in vogue right now among bankers.

"Our diversified business model and strong risk discipline contributed to record earnings per share along with continued strength in return on assets, return on equity and capital," CEO John Stumpf said in the bank's earnings release.

On the conference call, CEO Timothy Sloan referred to the bank's underlying diversification of revenue streams no less than three times in the first four paragraphs of his prepared remarks.

And in response to an analyst's question about the difficult interest rate environment, Stumpf brought the issue back to, yes, diversification, analogizing Wells Fargo to a stagecoach being pulled by "85 to 90 horses."

After the third or fourth time I heard this point, I couldn't help but think of the famous line from Hamlet: "The lady doth protest too much, methinks."

The point Wells Fargo's executives are trying to make is that even though it's the largest mortgage originator in the country (click here for a chart of the top five), it isn't solely reliant on the mortgage industry for growth and profitability.

As Stumpf alluded to, Wells Fargo has dozens of business lines that generate revenue -- from credit cards, to trust and investment divisions, and everything in between.

But while this is true, and despite Stumpf and Sloan's best efforts to divert our attention, the reality is that last quarter showed perhaps more than any other just how reliant Wells Fargo is on mortgages for growth.

If you exclude the precipitous decline in Wells Fargo's loan loss provisions, its pre-tax, pre-provision pr