In the middle of last month, one of Wells Fargo's (NYSE:WFC) top executives took part in the Morgan Stanley Financial Services Conference in New York City. Here are three of the most notable things, from the perspective of an individual investor, that he shared with the assembled analysts.
1. Relationship banking isn't dead (and branches aren't obsolete)
The proliferation of online and mobile banking has fueled the belief that relationship banking is obsolete. This logic holds not only that bank customers see little need for bank branches, but also that they also no longer look to financial companies as one-stop shops for a variety of financial products, such as checking and brokerage accounts, credit cards, and home loans.
Wells Fargo doesn't believe this is true (and, for the record, I don't either). The California-based bank has long generated superior returns by capturing customers' primary checking accounts and then building out the relationship by selling them additional products.
Wells Fargo's head of wholesale banking, Tim Sloan, addressed this point at the Morgan Stanley-hosted conference:
We want our prospects to get to know our people, to be comfortable with them, not only the ones who are going to be dealing with them on a day-to-day basis but also the rest of senior management. I spent a lot of my time out calling with customers, as do many of my colleagues. In addition, we look at what other products and services that we can bring to that relationship and that's part of the discussion with the customer. Because we just don't want to lend money, even though we like doing that. We want to create a very broad relationship at 7.2 products per relationship. It's something that we are very proud of.
2. Wells Fargo is widely diversified
When it comes to banking, few things are as important as diversification. This applies to both business lines and loan portfolios.
Having multiple streams of interest and noninterest revenue allows a bank to ride out the oscillations in the interest rate market without experiencing unsettling earnings volatility. Wells Fargo, according to Sloan, has "over 90 different businesses that perform differently across cycles based on a variety of factor, including customer needs, interest rates, economic conditions."
When interest rates fall, for example, Wells Fargo's loan portfolio makes less money. However, this is offset by a rise in noninterest income associated with originating and then selling residential mortgages.
Diversifying one's loan portfolio across geographic and industrial classifications is equally important. In the 1980s, for example, nearly every bank in Texas failed after oil prices plummeted, wreaking havoc on energy companies and commercial real estate prices in the Lone Star State.
This isn't a concern when it comes to Wells Fargo, which operates in all 50 states and distributes its loans across a wide spectrum of industries. In its commercial real estate portfolio, for example, no state accounts for more than 4% of its total loan portfolio. And when it comes to commercial and industrial loans, even the biggest subindustry that Wells Fargo lends to -- namely, financing investors -- accounts for only 5% of the bank's total loans.
3. There's still room to cross-sell
Wells Fargo's motto for cross-selling is "eight is great." Its goal is to have every customer use eight or more of its products, be it a checking account, credit card, auto loan, etc.
But even though the nation's fourth-largest bank by assets is closing in on that benchmark in its wholesale division, which accounts for a third of the entire company's profits, Sloan believes that there's still room for growth:
We have been able to grow the number of products that our wholesale customers used to 7.2 products per relationship. However we still have a lot of opportunity to better meet the financial needs of our customers through better product penetration. For example, three quarters of our wholesale customers have a credit relationship with us, but 25% do not. And likewise, 85% of our treasury management customers have a relationship with us, but again 15% do not.
So in those two product families which are the most penetrated, we still have a lot of opportunity to bring those products to new customers as well as to penetrate those relationships.
We have little reason to question Sloan's judgment and analysis when it comes to the points highlighted here. Wells Fargo has been one of the nation's best-run banks for decades, and it will probably continue to more than adequately reward shareholders for years, if not decades, to come.