Finalists, Part 2
The Norwest Case
by Dale Wettlaufer (

ALEXANDRIA, VA (September 10, 1998) --We like Norwest (NYSE: NOB) because it's a retail bank that knows who it serves and what its purpose is. All too often, larger banks try to be everything to everyone. And while a universal bank should be highly profitable and deliver more stable earnings, that never seems to be the case. The big New York banks have blown up because of foreign bond exposures, stupid real estate lending, and jumping into the junk bond game at the wrong time. It seems to go in cycles. We want banks that have very clear missions and go about those missions in a single-minded manner.

Norwest does this, though it is a diversified company. We just want a company that pursues long-term goals, and not one that blows in the wind on the latest fashions in banking. Of the larger banks, I think that NationsBank (NYSE: NB), BankBoston (NYSE: BKB), US Bancorp (NYSE: USB), State Street Corp. (NYSE: STT), Fifth Third (Nasdaq: FITB), First Tennessee (NYSE: FTEN), and M&T Bank Corp. (AMEX: MTB) all fit into this category, along with Wells Fargo/Norwest, the company in question today.

What I particularly like is the company's Wal-Mart-like retail focus on "agnosticism" on distribution. I addressed that earlier this year and will summarize that below. Tomorrow, we'll wrap up Mellon. (Also at the end of this column, please see the pro-forma numbers on Wells Fargo/Norwest.)

Operating Earnings By Unit (In millions)
Year Ended December 31, 1997

Mortgage Banking�..151.0
Norwest Financial+�..260.6

ROA By Unit:

Mortgage Banking�..1.06%
Norwest Financial+�..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 visits� 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 technology� 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.

Wells Fargo has definitely been tarred by its experience with the First Interstate acquisition. Since the deal was hostile, it was done with cash, which gave rise to tons of goodwill amortization on the income statement. However, the market has efficiently valued the company looking through that amortization while Wells Fargo has been able to enhance its per-share earnings with share buybacks that have shrunk the share base. Over the last couple years, though, many customers have felt that Wells Fargo didn't treat them well by messing up deposits and losing checks and charging for certain services as well as cutting back on customer services.

I believe that a bank is actually a consumer brand company, as I explained in March (Part 1 and Part 2 of "Banks as Brands") and that pushing customers away or trying to herd them hurts a brand over the long term. People are very sensitive about relationships that involve their money. It's a major reason why people get divorced, and it's a huge reason why they'll drop a bank and never come back again when their financial services provider treats them without the care that is due the customer. A customer has regular contact with his or her financial services provider. Rather than dreading that contact, the provider should look at every contact as an opportunity to increase the customer's satisfaction and brand awareness, and to market services that the customer isn't currently using.

That's something that Norwest understands but Wells Fargo has really struggled with. Norwest has been able to create an atmosphere of pleasing customers with personal service while offering a wide variety of products and services. There's no way in the world that can happen in banking without keeping employees happy. Wells Fargo sounds like it could use a big dose of that throughout the organization. That has to come from the top in an organization and that's one thing that Norwest CEO Dick Kovacevich can bring to the company.

In addition, there's no reason why Wells Fargo's current banking platform cannot be adapted to Norwest's multi-product strategy. I would think the new company will actually have to buy some branches or set up some branches to fill in holes in the Wells Fargo branch network where current points of contact don't offer a possibility for full service. However, there are already Norwest consumer finance stores and mortgage centers that could be converted to Wells Fargo banking centers. It seems as if the market and some pundits are forgetting that Norwest does indeed have a presence in Wells Fargo's home markets and that virtual relationships with certain Norwest customers on the West Coast can now be converted to fuller relationships with the combined company.

The Pacific Rim is where it's at for the coming century, and this bank will be an important consumer franchise on the West Coast and back across the country. There's no reason it also can't apply its strategies to the fastest-growing international markets in a McDonald's like fashion. Given its capital markets capabilities and its retail operations and marketing experience, I think this company has the tools to excel abroad and in the U.S.



Share Price.....$30 7/8
Market Cap.....$50,659.57
Price/ Tangible Book.....4.07
Price/Net Loans.....48.47%
Price/Tangible Assets.....28.38%

Amortization-Adjusted P/E.....16.64
Discount/Premium to Group.....59.7%
Cash EPS.....$1.86
Diluted Sharecount.....1,640.80
1998 EPS Estimate.....$1.74
1999 EPS Estimate.....$2.06
Multiple on 1998 Est......17.76
Multiple on 1999 Est......14.97
Amort-Adjusted Multiple on 1999.....13.47
Discount/Premium to Group.....20.6%

Capital Productivity/Efficiency

Asset Turnover2.....8.37%
Asset Turnover.....8.01%
Amortization Adjusted ROE.....25.53%
Net margin2.....20.52%
Net Margin.....17.99%
Efficiency Ratio.....58.06%
Interest Income/AEA.....7.77%
Interest Expense/AEA.....2.86%
Net Interest Margin.....4.92%
Net Share Buybacks (Including preferred).....$1,318.3
Dividends on Common.....$925.3
Preferred Dividends.....$45.7
Retention Rate.....69.61%
Payout Ratio on Amort. Adjusted Earnings.....30.39%
Internal Capital Generation Rate.....17.77%
Owners' Yield.....4.43%

Balance Sheet

Cash & Nonearning Assets.....$23,906.9
Cash & Nonearning Last Year.....$24,639.2
Long Term Debt.....$18,314.0
Shareholder's Equity.....$20,296.1
Last Year Equity.....$19,613.1
Tangible Equity.....$12,432.2
Last Year Tangible Equity.....$11,418.5
Tangible Assets.....$178,489.4
Last Year Tangible Assets.....$175,841.7
Total Assets.....$186,353.3
Earning Assets.....$162,446.4
Last Year Earning Assets.....$159,397.1
Last Year Assets.....$184,036.3
Total Liabilities.....$171,005.3
Last Year's Goodwill.....$8,194.6
Gross Loans.....$107,620.8
Loan Loss Reserves.....$3,097.1
Loan Loss Reserves %.....$0.1


Equity/Tangible Assets.....11.37%
Average Equity/Average Assets.....10.77%
Average Equity/Average Assets (Tangible).....6.73%
Avg. Assets/Avg. Equity (Tangible).....14.86
Loans to Deposits.....84.58%
LT Debt/Equity.....90.23%

Income Statement

Interest Income (TTM).....$13,772.6
Interest Expense (TTM).....$5,062.5
Net Interest Income.....$8,710.1
Provision for Loan Losses.....$1,276.8
Noninterest Income (TTM).....$6,126.8
Noninterest Expense (TTM).....$8,989.6
Net Income for Common (TTM).....$2,669.5
Amortization Adjusted Earnings.....$3,044.8
Noninterest income/interest income.....44.5%
Noninterest income/revenues.....41.29%
Noninterest income/NII.....70.34%
Amort. Adjusted Net/Revs......20.52%
Amortization of Goodwill.....$375.3

Credit Quality

Nonperforming Loans.....$732.5
Nonperforming Assets.....$911.8
Loan Loss Provision/Net Interest Income.....14.66%
Loan Loss Provision/Gross Loans.....1.19%
Charge Offs.....$1,713.6
Net Charge Offs.....$1,278.9
Nonperforming Assets Ratio.....0.85%
Reserves/Nonperforming Loans.....339.67%
Months Net Charge-Offs in Reserves.....29.1
Months Charge-Offs in Reserves.....21.7
Loan Loss Provision/Net Charge Offs.....99.84%


Noninterest bearing deposits.....$41,207.7
Noninterest bearing deposits last year.....$38,518.2
Noninterest deposits/deposits.....32.38%

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9/10 Close

Stock Close Change CPB $48 3/4 + 1/4 INTC $79 1/16 -2 3/16 JNJ $75 5/8 -1
Day Month Year History Drip (1.27%) 6.24% 6.56% (9.25%) S&P 500 (2.58%) 2.37% 1.01% 3.04% Nasdaq (2.41%) 5.75% 0.96% (0.52%) Last Rec'd Total # Security In At Current 09/02/98 8.027 CPB $52.867 $48.750 07/01/98 9.724 INTC $80.239 $79.188 08/07/98 6.543 JNJ $70.138 $75.625 Last Rec'd Total # Security In At Value Change 09/02/98 8.027 CPB $424.36 $391.32 ($33.04) 07/01/98 9.724 INTC $780.21 $769.98 ($10.23) 08/07/98 6.543 JNJ $458.92 $494.81 $35.90 Base: $1900.00 Cash: $186.05** Total: $1842.16

The Drip Portfolio has been divided into 81.201 shares with an average purchase price of $23.399 per share.

The portfolio began with $500 on July 28, 1997, adds $100 on the 1st of every month, and the goal is to have $150,000 in stock by August of the year 2017.

**Transactions in progress:
8/24/98: sent $200 to buy more CPB.