On Wednesday morning, Wells Fargo (NYSE:WFC) reported results for the company's fourth quarter ended Dec. 31. The bank reported increases in revenue and profits, driven by growth in lending, deposits, and non-lending businesses. Earnings per share came in at $1.02 per share, meeting analyst expectations.
The release was followed by the company's investor call to discuss the quarter's results, featuring CEO John Stumpf and CFO John Shrewsberry.
These executives didn't just rehash the obvious headline metrics in the call. They really got under the hood and talked about what really matters. Here are what I think are the three important quotes from the latest call, followed by my interpretation of why they matter to shareholders.
1. The bank's diversified income streams
According to CFO Shrewsberry:
[O]ver the past five years, mortgage banking as a share of total fee income has been as high as 28%. But because of the decline in mortgage refinancing activity, mortgage banking fees have declined as expected and represented 15% of fee income in the fourth quarter.
However, other businesses have benefited from current market conditions. Our trust and investment fees have steadily increased over the past five years and were 36% to fee income in the fourth quarter. These examples demonstrate the benefit of our diversification and how our business mix enables us to focus on meeting our customers' financial needs while retaining our risk discipline.
Wells' core business is lending money and accepting deposits, an old-school and very profitable business when done right. However, in today's era of low interest rates, that business can be pretty tough. Wells Fargo has, over time, built highly successful and complementary income streams designed to compliment the lending business and buoy profits through the ups and downs of interest rate cycles.
The best part, though, is that these businesses have low volatility and risk. It's not about hedge funds or private equity or trading. It's about providing simple and needed solutions to clients. In my opinion, you couldn't draw up a bank business model any better than that.
2. Shrewsberry on efficiency
Our efficiency ratio was 58.1% for full-year 2014. And we expect the efficiency ratio for full-year 2015 to remain within our target range of 55% to 59%. Even at the upper end of our target range, we are operating more efficiently than many of our peers.
I've written at length before on the importance of efficiency at banks over time. Wells Fargo has a decent efficiency ratio, primarily because of the bank's expansive branch network. What's remarkable about the bank, and why this quote resonates with me so much, is how consistent the bank is able to maintain an efficiency within its target range.
On an annualized basis, Wells has met its stated target range every single year except once since 2004 (and that was a 61% mark in 2011). That's a remarkable achievement, especially considering the near collapse of the entire financial system during the financial crisis and Great Recession.
3. Understanding both the ups and the downs of the credit cycle
Shrewsberry offered this opinion on the topic:
We've said in the recent past to expect [loan loss provisions] to taper now for the reasons that you mentioned, and I described, there could be future releases. There could be future net provisioning. So we're at that point in the cycle, I think.
And Stumpf had these big picture thoughts to add:
When I look at the businesses that we're in, and as I'm talking with customers, which I am every day, and talking with our business leaders and frankly looking at the numbers, 50 consecutive months of unemployment growth, unemployment in the 5.6% range, GDP 5%, and we probably have a few quarters this year start with threes.
So I'm optimistic. I don't think this is a breakout, but I think we're on the front foot and consumers' confidence is at an all-time high since the downturn. So the way I read the tea leaves, I'm optimistic.
I love the dichotomy of these two quotes, and while they at first may seem contradictory, I would argue that this is exactly the kind of approach you need to see in a bank management team. Let's break it down.
First, Shrewsberry's comment says that the bank is beginning preparations to increase its loan loss reserves in the event that there is an increase in problem loans. The loan loss reserves are basically a rainy day fund to protect the bank from future losses if loans go bad. In that light, one may think that the bank sees troubled times ahead. Since the end of the recession, banks have by and large been reducing reserves, not increasing them. Increasing reserves would be a marked change.
On the other hand, though, Stumpf paints a pretty optimistic (his word) picture for the future. Throughout the call, both executives talk again and again about the investments the bank is making for the future, for growth, and for the next 20 years of Wells' evolution. So what is it? Doom and gloom and loan losses, or sunshine and growth and profits?
The key, and what makes these last two quotes so significant to me, is that the bank sees a positive future for itself and for the U.S. economy, but it also recognizes the reality of the credit cycle. The U.S. economy does not grow in a straight line. It grows for a while, then there's a recession, and then it resumes growth.
The best banks, like Wells Fargo, plan for the downs and invest for the ups. It's a balancing act based on a long-term strategy. And for investors, it's a strategy that works.