Norwest & Wells Fargo
Finalist Number 2
by Dale Wettlaufer ([email protected])
Alexandria, VA (July 30, 1998) --Yesterday, we announced that we will be making our final decision soon. There are two finalists that we have selected, Mellon Bank (NYSE: MEL) and Norwest (NYSE: NOB). Yesterday, I didn't really write anything new about Mellon except to point out the company's mix of revenues. The majority of Mellon's revenues come from noninterest lines of business, meaning it's more of an asset management and trust services company than it is a lender. In other words, Mellon is a mix of a wholesale and a retail bank.
Norwest, on the other hand, is consumer bank. I am very attracted to the company's customer focus, as I wrote in my June look at the company titled "Norwest the Retailer." CEO Richard Kovacevich comes from a consumer products background and brings that sort of outlook to the bank. I'm not sure how else you're supposed to operate in the consumer banking business, as people take their money very seriously. Consumers don't mind paying a few extra fees as long as a company is totally committed to making every customer contact a good experience for the consumer. You really can't bat .500 in the banking business if you expect to keep your customers and cross-sell other products. It's just too competitive a business.
That's part of the reason why Wells Fargo (NYSE: WFC) got into trouble. With its hostile takeover of First Interstate, customer service got lost in the mix of streamlining operations and developing lower-cost ways of delivering service to the customer. However, Wells Fargo has probably already seen the worst in the runoff of First Interstate deposits. And while market share might have gone down, mind share probably hasn't taken the hit that some people think it has. The Wells Fargo name will be retained and will be the name of the new Norwest-Wells Fargo across the country.
I'm satisfied with the overall company's valuation and efficiency, though the amount of goodwill on the balance sheet makes it look less profitable than other banks. The reason for that is because accounting rules stipulate that goodwill be brought onto the balance sheet of the acquiring company in purchase transactions while pooling of interest transactions leave no goodwill. The problem with that is that amortization of goodwill overstates the cost of a debt-financed transaction because the interest expense of the debt already accounts for the cost to the acquiring company. To make comparisons across the industry comparable, we would need to add goodwill to all balance sheets whether or not any combinations were done through a purchase. Either that, or we would need to look at a company's assets minus goodwill and look at the income statement minus the expense of goodwill amortization.
While I will probably go through the banking industry and make the first adjustment at some point in the future, as my mind has changed a bit as to accounting for invested capital, I have followed the former regime of adjustments. Under that method, I am satisfied with the profitability of Norwest/Wells Fargo and like the plan of the merger. The companies are taking the integration slowly. In addition, Wells Fargo has recently guided analysts' earnings estimates higher, reflecting a better outlook on the company's standing with customers and the state of the California economy.
One thing that we have to consider with Norwest is its Drip fees. Apparently, its fees are high, and that is something that we will have to consider. Nevertheless, if we are going to hold something for 20 years, we could just amortize those costs over the holding period, which makes the yearly economic cost very low. In other words, over a 20-year period the damage that it does to our total yearly return is minimal. Also, as the holding grows, the expense of each addition to the position will shrink in relation to the total position. So, fees will enter into our investment decision-making here, although I think it's more important to consider the investment first and the incidental expenses of the investment second.
Below, I have included the pro forma numbers for the combined Norwest/Wells Fargo, and I have also included links to past articles on the two companies.
06/15/98: Norwest Corp.
06/16/98: Norwest the Retailer
06/17/98: Norwest, Part 3
07/16/98: Norwest, the 2nd Finalist
07/17/98: Norwest and Wells Fargo
05/14/98: Wells Fargo Joins List
04/27/98: What's ROE2?
(Financials in millions)
Price/Valuation
Share Price.....$37
Market Cap.....$60,988.58
Price/Book.....3.09
Price/ Tangible Book.....5.18
BVPS.....$11.97
Price/Assets.....31.95%
Price/Net Loans.....58.87%
Price/Deposits.....46.86%
Price/Tangible Assets.....33.33%
Price/Revenues.....4.19
P/E.....24.40
Amortization-Adjusted P/E.....21.22
(Discount)/Premium to Group.....4.1%
EPS.....$1.52
Cash EPS.....$1.74
Diluted Sharecount.....1,648.34
1998 EPS Estimate.....$1.73
1999 EPS Estimate.....$2.25
Multiple on 1998 Est......21.34
Multiple on 1999 Est......16.44
Amort-Adjusted Multiple on 1999.....14.94
(Discount)/Premium to Group.....(10.4%)
Capital Productivity/Efficiency
Asset Turnover2.....8.07%
Asset Turnover.....7.73%
ROE2.....14.64%
ROE.....12.73%
Amortization Adjusted ROE.....24.96%
ROA.....1.53%
ROA2.....1.595%
Net margin2.....19.75%
Net Margin.....17.18%
Efficiency Ratio.....58.83%
Interest Income/AEA.....7.58%
Interest Expense/AEA.....2.77%
Net Interest Margin.....4.81%
Net Share Buybacks (Including preferred).....$1,989.2
Dividends on Common.....$931.2
Retention Rate.....67.59%
Payout Ratio on Amort. Adjusted Earnings.....32.41%
Internal Capital Generation Rate.....16.87%
Owners' Yield.....4.79%
Balance Sheet
Cash & Nonearning Assets.....$24,991.4
Cash & Nonearning Last Year.....$26,461.5
Long Term Debt.....$18,339.3
Shareholder's Equity.....$19,722.5
Last Year Equity.....$19,533.4
Tangible Equity.....$11,768.5
Last Year Tangible Equity.....$11,257.8
Tangible Assets.....$182,959.7
Last Year Tangible Assets.....$177,437.7
Total Assets.....$190,913.7
Earning Assets.....$165,922.3
Last Year Earning Assets.....$159,251.8
Last Year Assets.....$185,713.3
Total Liabilities.....$171,005.3
Goodwill.....$7,954.0
Last Year's Goodwill.....$8,275.6
Gross Loans.....$106,666.4
Loan Loss Reserves.....$3,066.3
Loan Loss Reserves.....2.87%
Leverage
Equity/Tangible Assets.....10.78%
Average Equity/Average Assets.....10.42%
Average Equity/Average Assets (Tangible).....6.39%
Assets/Equity.....9.59
Avg. Assets/Avg. Equity (Tangible).....15.65
Loans to Deposits.....81.96%
LT Debt/Equity.....92.99%
Income Statement
Revenues.....$14,548.7
Interest Income (TTM).....$13,659.5
Interest Expense (TTM).....$4,988.8
Net Interest Income.....$8,670.7
Provision for Loan Losses.....$1,230.2
Noninterest Income (TTM).....$5,878.0
Noninterest Expense (TTM).....$8,933.8
Net Income for Common (TTM).....$2,499.1
Amortization Adjusted Earnings.....$2,873.6
Noninterest income/interest income.....43.0%
Noninterest income/revenues.....40.40%
Noninterest income/NII.....67.79%
Amort. Adjusted Net/Revs......19.75%
Amortization of Goodwill.....$374.6
Credit Quality
Nonperforming Loans.....$711.8
Nonperforming Assets.....$929.9
Loan Loss Provision/Net Interest Income.....14.19%
Loan Loss Provision/Gross Loans.....1.15%
Charge Offs.....$1,728.3
Recoveries.....$427.2
Net Charge Offs.....$1,301.1
Nonperforming Assets Ratio.....0.87%
Reserves/Nonperforming Loans.....329.75%
Months Net Charge-Offs in Reserves.....28.3
Loan Loss Provision/Net Charge Offs.....94.55%
Deposits
Deposits.....$130,148.5
Noninterest bearing deposits.....$43,026.9
Noninterest bearing deposits last year.....$39,669.3
Noninterest deposits/deposits.....33.06%
Deposits/Liabilities.....76.11%
CKROE.....1.35
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