Want to know why banks like Wells Fargo (NYSE:WFC) and U.S. Bancorp (NYSE:USB) have outperformed Bank of America (NYSE:BAC) and Citigroup (NYSE:C) over the past two decades? The slideshow below offers an answer.
In short, Bank of America and Citigroup got carried away chasing revenue in the lead-up to the financial crisis, subordinating the authority of risk managers to that of revenue generators. The net result was that both of these banks suffered unprecedentedly large losses. Citigroup lost $28 billion in 2008 alone, and Bank of America has written off a total of $195 billion in crisis-related expenses over the past seven years.
Conversely, Wells Fargo and U.S. Bancorp have long prided themselves on the ability to boost revenue without unduly sacrificing risk management. "In financial services, if you want to be the best in the industry, you first have to be the best in risk management and credit quality," Wells Fargo's chairman and CEO wrote in the bank's 2007 annual report. "It's the foundation for every other measure of success." U.S. Bancorp's CEO Richard Davis would almost certainly agree.
The slideshow below should add structure to how you, as an investor or banker, perceive this issue. It traces the relationship between the three most important variables that must be navigated in order to operate an exceptional bank.
John Maxfield has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Wells Fargo. The Motley Fool has the following options: short January 2016 $52 puts on 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.