Alexandria, VA (June 16, 1998) --Norwest Corp. (NYSE: NOB) is much more than a bank. A lot of banks calls themselves financial services companies and do offer a wide variety of services to their customers, but few bank holding companies (which is really what you invest in when you buy a bank) have achieved the profitable and meaningful diversity that Norwest has executed on.
There are a couple of ways to look at a company's diversification. The company's ratio of noninterest income to net interest income is one gauge of performance. On that score, Norwest's ratio is 74.6%. That's pretty large but not extraordinary. Citicorp (NYSE: CCI), for instance, sports a ratio of 92.6% while American Express (NYSE: AXP) is nearly 330%. Another way to look at it is just as a share of revenues. Perhaps the most plain vanilla bank you can find is KeyCorp (NYSE: KEY), with a 30.6% ratio of noninterest income to total revenues. Amex is at 76.7% while Norwest's ratio is 42.7%. The large money-center banks generate noninterest income through capital markets operations and wholesale banking operations such as trading, underwriting, asset management, trust, custody, and securities administration. Norwest is a lender and servicer of loans, at its core. It has all the qualities of a superregional or money center bank, but it's in the business of providing loans to people.
If one were to judge Norwest only by its funding mechanism, one would guess it's a money center bank. Even Citicorp has a higher deposits/total liabilities ratio than Norwest, indicating that this isn't just a community lender. What it is, in fact, is a consumer finance company with thousands of branches through the U.S. and internationally.
Operating Earnings By Unit (In millions)
Year Ended December 31, 1997
- Mortgage Bankingï¿½..151.0
- Norwest Financial+ï¿½..260.6
ROA By Unit:
- Mortgage Bankingï¿½..1.06%
- Norwest Financial+ï¿½..2.67%
ROA of 2.67% is very impressive. With leverage of 12-1 (assets to equity), ROE in this business can get well over 30%. This offsets the returns in mortgage banking, which are low because it's very difficult to add lots of value in this commodity market. Nevertheless, it's an attractive one to Norwest because it can pull in mortgage customers to other products and because the mortgage banking operations feed other parts of the bank such as capital markets.
The company had 727 mortgage banking locations in 50 markets, as of the end of 1997. This is a powerful distribution base because the company can market services to customers in markets where it doesn't have a branch banking presence. Norwest also has an additional 1,447 consumer finance stores (like The Money Store, which is being acquired by First Union) in 48 states, across Canada, and internationally. The company follows a McDonald's strategy for growth, according to CEO Dick Kovacevich, who made explained in The New Financiers, by Charles Wendel:
"A lot of people do view the branch as a transaction center. Our view of a branch is that it's one hell of a sales center. It's an opportunity to sell something to every customer who visitsï¿½ We see ourselves as a distributor of financial services. The model for us is the retailer. Starbucks, for example, distributes coffee, Wal-Mart distributes home improvement products. We distribute financial services. Our products are commodity-like. But so is coffee, general merchandise, and tools. How do you differentiate a commodity? By the way you distribute it; by your sales process, pricing, service, people, and technologyï¿½ We can open stores faster, gain better distribution and market share, and so forth. We can do it time after time after time in our chosen markets. Before anybody wakes up, you are such a formidable player and have such a customer base that it is very hard for others to come in and do it after you."
If you know Wells Fargo (NYSE: WFC), Norwest's merger partner, you know some of this sounds worlds different than the vision that Wells Fargo has pursued over the last couple years. Because of this, the market hasn't known what to do with Norwest's equity, except take it down a few notches. I believe that creates opportunity in Norwest, which we'll talk about tomorrow.