In this episode of Market Foolery, Chris Hill talks with Jason Moser about some business news. Wells Fargo (NYSE:WFC) is only down about 4% on some really rough earnings. The market seems to be giving new CEO Charles Scharf some room to work before judgment day. Hopefully he can turn this sinking ship around and get the bank back on track. Visa (NYSE:V) paid a massive $5 billion for API company Plaid, but there's probably a sound strategy to that sum.
And BlackRock (NYSE:BLK) means business when it comes to sustainability, according to CEO Larry Fink's annual letter to shareholders. Tune in to find out more.
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This video was recorded on Jan. 14, 2020.
Chris Hill: It's Tuesday, January 14. Welcome to Market Foolery! I'm Chris Hill. With me in studio: Jason Moser, back from his trip. How was your time away?
Jason Moser: It was very, very lovely. Just took a quick jaunt down to Georgia to go see the folks, and anytime I do that, I get to play a little golf with my dad, which is always special. I picked a great weekend to do it. The weather was lovely and warm. Not really what you'd consider January, even down there. But yeah, back safely. I was flying Delta. I feel like maybe I had a little bit to do with those great results and the stock pop for today.
Moser: Just trying to make myself feel better. Took the day off work yesterday.
Hill: I feel like I'm subbing in for you on Industry Focus, because this is going to be a finance-themed show here on Market Foolery. We're going to get into Visa's latest deal, we're going to discuss Larry Fink's annual letter to shareholders. And the phrase that pays from the BlackRock CEO is "a fundamental reshaping of finance." We'll get to that.
But earnings season starts this week, and up first are the big banks, and up first for us is Wells Fargo, because Charles Scharf has been the CEO of Wells Fargo for such a short amount of time I haven't even learned how to pronounce his last name, just a couple of months. And fourth-quarter profits were down 55% year over year. That sure sounds like a lot. Shares of Wells Fargo only down about 4%. But you looked at the quarter more closely than I did. What did you think?
Moser: Yeah, well, I mean, I always say we're living in an adjusted EBITDA world now. You can chalk up any results you want and ultimately just adjust them and make a rationale and make a case for it. I guess it's just a matter of how often you're making adjustments and why. But I think with Wells Fargo, the storyline for most of the media is that this is Scharf's first quarter, and he's going to get on the call, want to see how he's going to approach this business. I think that right now, when we talk about the banking sector at large, most banks right now are just treading water, dealing with this interest rate environment, because, as we talk about often with these low interest rates, it makes it more difficult for banks to hit those profit growth numbers. But Wells Fargo has this added degree of difficulty in needing to right the culture of the company and clean up what's really been a very messy situation over the past few years, and that is going to take some time.
Hill: It's also going to take some money.
Moser: It is going to take some money, it will. And speaking of money, which, the banks are in the business of money, the metrics aren't that bad, really. I mean, there's nothing that was really unexpected. Net interest margin was down 13 basis points from a quarter ago. Modest growth in average deposits. Deposits was a number we've always been kind of paying attention to over the last several years just because of the fake account scandal and whatnot. So, knowing that you've still got depositor trust, and they're going to continue to deposit their money in the bank, is good.
There's modest growth in lending as well. And that's actually in the face of something I was reading today, with the average FICO score in the U.S. hitting a record high of 703 in 2019. That's very good for a business like Wells Fargo and these other big banks, because they're in the business of lending money. And so then it's just a matter of making good lending decisions. We could debate what goes into those FICO scores all day long, but the fact of the matter is, you have a bigger pool of qualified borrowers now than you did before.
I think the number that stands out to me, the efficiency ratio, which, if we talk about the efficiency ratio for a bank, that's noninterest expense divided by total revenue. These banks, you'll see them chalk up anywhere from 50% to 55%. Wells was 78.6% for the quarter versus 63.6% a year ago. Either way, very bad. But a lot of that is tied to the operating losses, which is tied to a lot of the litigation expenses they keep on having to maintain. So there's plenty of work to do. But for the first quarter, I think he made us believers, I think. I mean, I'm willing to give him a little slack here and see where he takes us.
Hill: Yeah, he set aside another $1.5 billion for legal charges to go into the fake-accounts scandal, cleaning that up. He did talk about promising fundamental changes in terms of the culture. And I think one of the things that works in his favor is, he's got another few months. And this is one of those things that the optics are bigger than the actual underlying impact, but I think the optics will matter a little bit here. He's going to have another full quarter of results that he gets to report before Berkshire Hathaway's annual meeting in early May. Because you have to believe Buffett is going to be asked about Wells Fargo at the annual meeting.
Moser: Yeah, I mean, he will be, and I'm sure he'll answer it like he normally does. "Oh, Wells is a well-run bank, just ran into some tough times or whatever, but we believe in Charlie and think that he'll do the right thing." And maybe he will. I mean, I do think for Wells, right now, I mean, going back to that treading water versus this added degree of difficulty for Wells Fargo, because they have to appease regulators. And a lot of that boils down to bringing more people in to your risk-management division and figuring out ways to deal with a lot of this mess that was created over the past several years.
And then you hear a statement, like he says, where he calls Wells' cost structure too high. He's got to figure out a way to make this bank run more efficiently because ultimately, at the end of the day, that's the big advantage of these big banks, is being able to take advantage of that scale and run as efficient an operation as possible. They can't do that right now because they've got to clean up all this mess. I mean, Wells isn't going anywhere. I mean, it's still a very big part of our overall economy. I would not be surprised to see three years down the road, this being a good time to actually have considered buying shares, because I mean, I hate to say too big to fail, but ultimately, let's just be real, Wells Fargo is too big to fail.
Hill: Well, and we've seen some stocks recently where you look at the 52-week high and low, and the difference between the two is up north of $100. In the case of Wells Fargo, I think the difference between the 52-week high and low is something like $10 or $11. It's close to the 52-week low, but look, if Scharf does what he says he's going to do, then, yeah, we may look back on this as, like, "Oh yeah, that was the time to buy it."
Moser: Yeah, to be continued. I mean, we'll see, quarter in and quarter out. We just want to hold him to his words.
Hill: On Monday afternoon, Visa announced it is buying Plaid for $5.3 billion. Plaid develops APIs for financial services businesses, application programming interface. It basically helps developers share banking and financial information more easily. I'm assuming everybody loves this deal, because shares of Visa are up ever so slightly in the two trading days we've had this week. This is obviously after they've announced they're cutting a check for $5.3 billion. And by the way, good for the folks at Plaid, because the last round of private financing they did was about 15 months ago, and the valuation of Plaid was half of what they got bought at.
Moser: Yeah, I don't think it's too strong a statement to say that Visa is overpaying for this. I mean, I'm quite certain that they are. But by the same token, I think this could have gotten into a bidding war if they weren't careful. Because if you look at the interested parties here, you had investments from MasterCard and Visa, American Express, along with a number of others, early on in Plaid's development. This is a company that I think has had a lot of interest early on. I mean, this is what makes companies like Visa and MasterCard so attractive from the investor's point of view. I mean, they have the scale and these network effects, and they're so big they have the ability to make these little acquisitions, or in this case, it's a bigger acquisition, but in the context of Visa, it's not that big of an acquisition. Then it just boils down to making good acquisitions.
And I think that with Plaid, I mean, we don't know as much about it as we would if it were public, but it is a pretty cool-looking company. I mean, if you look at some of the things that Plaid does, I was looking through some of the case studies in regard to the different markets that it serves. And so if you look at a scenario from the payments perspective, for example, and Venmo is a customer of Plaid's, they would cite the problem that receiving payments via direct bank transfer is less expensive than using credit cards, but getting users signed in and authenticated is hard. And so Plaid essentially builds the backbone of this infrastructure to be able to get those users signed in and authenticated. They make it easier to set up bank payments through a user experience that focuses on security and relationships with financial institutions.
I mean, if you look at it from a lending perspective, and it's noteworthy that Ellie Mae is a customer of Plaid. And remember, we talked a lot about Ellie Mae before they were acquired. But the problem in lending that lenders have to gather this holistic picture of their applicants. But there's so much work that goes into that. And you have to ask these applicants for more and more work. And so Plaid provides borrowers with a nice, streamlined loan experience. Trying to simplify everything and use technology to gather all of this information and make sense of it. And so, I think, to me, I can see how this acquisition gives Visa another way to continue growing the business down the road. It probably isn't as clear today because Plaid isn't one of those consumer-facing names that everybody knows about. But chances are very good that if you're moving money between entities from your financial institution to a personal finance app or some bill pay or whatever, Plaid very well could be doing that work for you.
Hill: So because Plaid was a private company when they got bought, we don't have great insight into their numbers. I am curious, though, if you think that what we saw in the last, call it five, six months of 2019 in terms of the IPO market, if that had any effect on Plaid's decision to sell. Because one comparison I read this morning was comparing Plaid to Twilio, another sort of behind-the-scenes software company that provides a platform for a lot of businesses. And all things being equal, if you're a long-term shareholder of Twilio, you're pretty darn happy.
Moser: Yeah. And that's funny that you say that, because Twilio was the first company that came to mind for me. I mean, they're different, of course, but the nature of the business is very similar. And so yeah, I mean, I feel like the owners of Plaid, they made a mint off this. And that's locked in. I mean, we focus on publicly traded companies, but we also have to acknowledge that it's very difficult to be a publicly traded company. Once you get out there in the scrutiny of the markets, you may think you have the best solution in the world, but we're going to find some ways to scrutinize you. And it's not to say that Plaid necessarily would have fallen into that bucket, so to speak. But, you know, it's not necessarily the easiest business to understand. So there's certainly room for inefficiencies and mispricings in trying to figure out exactly what the company does.
They've done a lot to this point. They connected 11,000 financial institutions at this point in the U.S., Canada, and Europe. So, they built something really special. And my bet is, from the founders perspective, they think, "You know what? This is obviously a lot of money. This is probably beyond what we ever could have dreamed." And now they're going to have the opportunity to see this business, what they built, continue under the stewardship of a company that obviously is going to play a very important role in our financial system for many, many years to come.
Hill: Larry Fink, the CEO of BlackRock -- I would add parenthetically, the largest money manager in the world -- Larry wrote his annual shareholder letter. And in it, he says there's going to be a fundamental reshaping of finance. And I will just quote something he said on CNBC this morning. I caught part of an interview that he did with Andrew Ross Sorkin where he said, "I didn't write this letter as an environmentalist, I wrote it as a capitalist." And that's how we're talking about it.
Moser: Don't at us.
Hill: Don't at us. We're coming at this as capitalists. So you actually read the letter. Tell me what you think. Because based on what I read this morning, based on what I saw in the interview, there are going to be more details to come for BlackRock shareholders, but it seems like, right out of the gate, one of the things BlackRock is going to do is look at where they're investing their institutional money, and when those board members come up for a vote, one of the things BlackRock is going to start to do is ask companies, "Regardless of your business, what is your plan for sustainability? And if you're not coming forth with one, we're just going to blanket vote against all of you."
Moser: Yeah. Well, and, I mean, I think investing is a lot about how you view the world and the lines that you ultimately draw and where you want your investment dollars to go. And I think Larry astutely noted in the letter that this is an issue that's very long term in nature. And so this is not something that is like a recession or a currency crisis, right? Or inflation concerns. Those go away after a while.
Hill: This is not the housing crisis of 2008, 2009.
Moser: Right. I mean, this is a situation, this is an issue, that is very long term in nature. And when we say long term, we're talking about decades. And so I think that climate change is not going away. Whether you believe it or not, that's irrelevant. It's not going away. And what you have to recognize is that as time goes on, and as younger generations start to step into positions of power and leadership, this is going to be an issue that becomes front and center for a lot of people. It is only going to grow. And so from that perspective, I mean, this was a sharp letter, because he talks about this reallocation of capital, and some of the questions that he pondered in this letter -- and this will, I think, make a little bit more sense of it, when you start thinking about things like, will cities be able to afford their infrastructure needs as climate risk reshapes the market for municipal bonds?
Another really good one, I thought, what will happen to the 30-year mortgage? The 30-year mortgage, he says, is a key building block of finance, very correct. What happens to that 30-year mortgage of lenders can't estimate the impact of climate risk over such a long timeline? You're talking about the market for flood and fire insurance, whatever that may be. How does that reshape the lending market? What happens to inflation and interest rates if the cost of food climbs from drought and flooding?
So these are the types of questions that he's talking about. And no, that stuff doesn't happen overnight. These things are coming down the pike. You have to be aware of that. And so that is what he means when he's talking about this reallocation of capital. And I think that he's looking at this from the perspective of, "All right, we're shaping up our investing philosophy. This is what we stand for. This is what we believe is going on." And whether you believe it or not, it's happening, and so you'd better be looking at it from the investor's perspective. It's about transparency, it's about holding companies and leaders accountable, it's about conscious capitalism. We talk about that a lot here. We hear David Gardner talk about it often. It's something very important to us here at The Motley Fool. These are the types of things that Larry is talking about.
And I think that one point he made there, over time, you're going to see companies and countries that do not respond to stakeholders and address the sustainability risks. They are going to start encountering more skepticism. Their costs of capital are going to go up. And that will have a direct impact on how they pan out as investments. And so, again, this isn't something that's over the course of the next five years. This is over the course of the rest of our lifetime and well beyond. And so it's nice to see that he's getting these thoughts here early. And I think a lot of people will take note, because he obviously holds a lot of sway.
Hill: Well, and certainly, there are companies that we talk about every week, every month, that already have sustainability plans in place. You look at a company like Walmart, which has, for the past decade, been focused on their physical locations, including programs around rainwater, and how do we get more efficient around electricity. But Larry Fink's letter reminded me of two things. One was Matt Argersinger years ago talking about the economics of solar power and just sort of showing me a graph one time where it's just basically showing the dramatic drop in costs.
Moser: I recall that.
Hill: And then it's like, so, what do you do when the cost of solar power -- because, when we were growing up, it's like, "Solar power? That's a crazy future thing." And then, all of a sudden, you become a homeowner, and it's like, actually, when you run the numbers, depending on where you live and any number of other factors, the cost of solar power can be dramatically less than what you're currently dealing with in your home.
The other thing it reminded me of was a guy I interviewed for Motley Fool Money a couple of years ago, a guy named Tony Seba, who is part of a think tank out in California called RethinkX. And he had written this report about a bunch of things, but the one that caught my attention was the ripple effect of autonomous vehicles, and thinking 20, 30 years in the future, what does it mean for things like cities that depend on parking tickets for revenue? What does it mean for businesses that are in the business of parking garages? If all of a sudden car ownership drops, and cars-as-a-service becomes something? And instead of, I own a car, and 95% of the day, it's not being used, it's just in a parking spot somewhere; instead, we all subscribe to cars as a service, and cars are constantly being used, you don't have a need for parking. Well, what happens to parking garages?
Moser: Well, yeah. I mean, I think the point Larry is making here is, "Hey, listen, this isn't something that's happening tomorrow. I mean, this is something that's going to be unfolding over the next 40-plus years. And so, we're trying to see around that corner." You don't want to start addressing this problem after the problem has already completely changed your life. You want to be prepared for this as the world changes. Like anything, it's not something that happens overnight. We talk about self-driving cars, we talk about electric cars. The expectation in a decade for self-driving cars to be the majority of cars on the road is silly, because think about all of the cars out there today that are not self-driving. Almost all of them! And you're not going to just convince everybody to go buy a new car, right? I'm going to be driving my car hopefully for the next six, seven, eight years, right? It's a gas-guzzling car. I'd love if the next time I can go ahead and buy an electric car. Maybe that'll be something that I can do.
But my point is that it takes a lot of time for this stuff to unfold, and that's why it's so key that he's getting this thinking out there now, is because it's all about seeing around that corner and getting prepared. Think about it well beyond just like cars. I thought his examples of cities and mortgages and inflation and food, those are all so valid and relevant points and great questions to ponder. And those are the kinds of crises that are dictating this thinking. And I think more and more people are going to adopt this mentality. It's better for everyone. It's better for capitalism.
Hill: It'll be interesting to watch BlackRock throughout 2020, if they start making announcements in terms of how they're voting with respect to boards of directors, if they begin to divest from certain investments. More immediately, next week in Davos, we've got the World Economic Forum. I'm pretty sure this is going to be a topic of discussion.
Moser: I would imagine it'll come up. And again, we're not sitting here putting ourselves on this perch saying, "This is what you need to think." I think at the end of the day, regardless, listeners out there, take note of this as a reminder that you need to figure out as an investor what matters to you. Figure out your philosophy in life and investing. Draw the lines. What are the companies that you don't want to invest in? What are the things that you don't want to be a part of? This isn't necessarily about telling you how to think, it's just giving you the ideas to help shape your thinking. And I think that's ultimately the most important part as an investor, knowing yourself and then being able to shape your thinking accordingly. And always be open-minded to changing that a little bit as the world moves on, because nothing ever stays the same.
Hill: Jason Moser, thanks for being here!
Moser: Thank you!
Hill: As always, people on the program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. That's going to do it for this edition of Market Foolery. The show's mixed by Dan Boyd. I'm Chris Hill. Thanks for listening! We'll see you tomorrow.