If you're reading this, you probably remember the financial crisis. And if you remember the financial crisis, then you probably know that bank stocks can be very risky. But not all banks are created equal. Some, like Wells Fargo (NYSE:WFC), happen to be much safer than others.
Wells Fargo's chief financial officer, John Shrewsberry, touched on this point at the bank's recent investor day. He did so by sharing data points related to Wells Fargo's foreign exposure, as well as its exposure to the capital markets through its relatively small trading operations.
Wells Fargo is a domestically oriented bank. It focuses on lending to American companies as well as to consumers who want to buy a house or use a credit card. Only 4.4% of its assets stem from investments abroad. That compares to roughly 11% at Bank of America (NYSE:BAC) and JPMorgan Chase (NYSE:JPM), and to 52.3% at Citigroup (NYSE:C).
From a risk perspective, this reduces the damage that a faltering China or Europe will have on Wells Fargo's top and bottom lines. Suffice it to say that the same won't be true for Citigroup, which looks abroad for more than half of its balance sheet.
Wells Fargo has also shunned the allure of Wall Street, which exposes banks to an inordinate amount of risk relative to the prospective profits therefrom. This is rare for a bank its size. JPMorgan Chase and Citigroup have always been an integral part of Wall Street, while Bank of America took the plunge with its 2008 acquisition of Merrill Lynch.
This isn't to say that Wells Fargo doesn't have any trading-related risk, but rather that it has much less than its peers. You can see this in the chart below, which compares the relative amount of trading assets at Wells Fargo to JPMorgan Chase, Bank of America, and Citigroup.
Another way to think about this is through the concept of value at risk, or VaR. This estimates how much a company could lose on a given day from capital markets activities -- i.e., trading. Bank of America serves as a case in point. Its average one-day VaR last year was $53 million. At a 99% confidence interval, in other words, the North Carolina-based bank should lose no more than $53 million in a single day from its trading operations.
Given Wells Fargo's comparatively minute trading operations, you probably won't be surprised to hear that it has the lowest VaR among the nation's biggest banks. Its average one-day VaR in 2015 was only $19 million. That's meaningfully lower than Bank of America's. It also comes in below JPMorgan Chase's $44 million and Citigroup's $86 million.
When you add these points to the fact that Wells Fargo hasn't lost money on an annual basis since at least the mid-1960s -- I say "at least" because 1966 is the oldest data I could get -- this underscores the fact that the California-based bank is as close to a widow-and-orphan stock as one can get in the bank industry.
John Maxfield owns shares of Bank of America and Wells Fargo. The Motley Fool owns shares of and recommends Wells Fargo. The Motley Fool recommends Bank of America. 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.