Wells Fargo & Company (WFC) is a big Western and Midwestern bank which offers a wide variety of financial services to its over 23 million customers. The business employs greater than 150,000 people at its over 6,000 locations nationwide. Wells Fargo has about $500 billion in assets.
As the company is constantly derive over half its revenues from interest income (about $26 billion), its activities usually are not confined to collecting deposits and lending money. Wells Fargo engages in other businesses including brokerage services, asset management, and investment banking. The business also makes venture capital investments.
Over the last 10 years, Wells Fargo has averaged a 1.57% return on assets as well as an 18.19% return on equity.
Wells Fargo is closely related to California in the minds of most investors. The business now operates in 23 different states. However, the concentration in California remains.
Mortgage lending in California accounts for approximately 14% of Wells Fargo’s total loan portfolio. Commercial real estate property loans in California make up another 5% of the company’s total loans. Not one other single state accounts for a similarly sized portion of total loans. In fact, neither mortgage lending nor commercial real estate lending in almost any other state accounts for longer than 2% of Wells Fargo’s total loans.
Wells Fargo’s center on cross-selling is known. The company includes a stated goal of doubling the number of products the standard consumer and business customer has with Wells Fargo to eight products per customer (in the current four products per customer).
Cross-selling increases Wells Fargo Customer Service number stickiness. It may also help increase profitability by decreasing expenses relative to revenues. The need for a sizable physical footprint is reduced – as they are the requirement for a huge number of bankers. Instead, the existing infrastructure can provide additional revenue in the same customers.
Wells Fargo’s Chairman & CEO, Richard Kovacevich, explains the significance of the company’s cross-selling in the “Vision & Values” portion of the corporate website:
Cross-selling — or whatever we call “needs-based” selling — is our most critical strategy. Why? As it is an “increasing returns” enterprise model. It’s just like the “network effect” of e-commerce. It multiplies opportunities geometrically. The more you sell customers the greater number of you understand about them. The more you know about them the simpler it is to offer them more products. The better products customers have together with you the 03devmpky value they receive and the more loyal they may be. The more time they stay with you the more opportunities you must meet a lot more of the financial needs. The more you sell them the higher the profit since the added cost of selling another product to an existing customer is normally just about ten percent of the expense of selling that same product to an alternative customer. This provides us–being an aggregator — a substantial cost advantage on one product or one channel companies. Cross-selling re-invents how financial services are aggregated and sold to customers — the same as other aggregators such as Wal-Mart (general merchandise), Home Depot (redecorating products) and Staples (office supplies).
Mr. Kovacevich’s enthusiasm to the cross-selling model is well justified. It is not easy to quantify the importance of meeting every one of the varied needs of the customers, since you can not appraise the opportunities you missed. However, it really is obvious that reducing each customer’s curiosity about considering a competitor’s services will greatly increase long term profitability for just about any company engaged in any collection of business – not just to get a bank.
Later, from the same website section, Mr. Kovacevich addresses the significance of customer stickiness:
(Cross-selling) is our most important customer-related sales metric. We should earn 100 % of the customers’ business. The greater products customers have with Wells Fargo the more effective deal they get, the greater loyal these are, as well as the longer they remain with the organization, improving retention. Eighty percent of the revenue growth originates from selling more products to existing customers.
This focus on retention is an integral part of the long-term plan to keep up Wells Fargo’s above-average returns on assets and equity. Extraordinary profitability comes from differentiating your product or service from the ones from your competitors. Increasing customer stickiness and reducing “shopping around” is actually a key element of maintaining extraordinary profitability.
Some businesses are blessed with enviable economics because of their product’s natural prominence inside the minds with their customers. Most companies are passionate about market share. But, just how many think about “mind share”? Obviously, a product like Coke (KO), Hershey (HSY), or Snickers will have a good association in the minds of consumers.
For many people, these kinds of products may also have a prominent area in each customer’s mind (in accordance with other products on what money might be spent). A few other businesses possess a healthy mind share with no positive association; GEICO is the most obvious example. The company’s brand invokes only the phrase “auto insurance”. Of course, that’s all the GEICO brand has to do.
So, precisely what does all of this have to do with Wells Fargo? Mind share isn’t just the result of exposure to advertising. In fact, in most cases, being exposed to advertising simply cannot duplicate the type of results which a direct, differentiated experience creates. Entertainment properties are by far the leaders at heart share. People that saw and loved Star Wars remember the film. In reality, they don’t remember the film, they really file it away (or, more precisely, cross reference it) in countless ways in their mind.
Evidence for this particular particular example is abundant. There are many references to Star Wars in other media. The name, the background music, the opening text and countless other elements are immediately recognizable. The films Star Wars fans hated made additional money than any movies in the background of cinema – and that was decades following the original became available. So, obviously Star Wars has the sort of lasting mind share any company should aspire to if it hopes to continuously earn extraordinary profits.
Unfortunately, most businesses, however well run, simply cannot attain these kinds of mind share. The products and services they give will never be as differentiated and memorable as a motion picture. Equally as importantly, the positive associations will never be present, mainly because the product or service is not inherently exciting, entertaining, or pleasant. This is clearly the truth in financial services.
So, so what can a monetary services company do in order to improve its mind share? The most obvious tactic is actually to “wow” its customers. The truth is, Wells Fargo’s CEO discusses this type of option inside the “Vision and Values” part of the company’s website:
We must “wow!” them. We realize what that feels like because we’re all customers. We go to the cleaners, the supermarket, a cafe or restaurant or whatever, therefore we get a situation where we’re “wowed!” We walk out therefore we say, those really listened to me and helped me get the things i need. All of us hear stories about customers, say, who choose a certain line with the supermarket since they know the individual who bags the groceries connects with customers — smiles, greets regular customers by name, asks how their families are doing. Each time a personal banker helps a client in one in our stores, or each time a customer gets the help of one of our phone bankers or does transactions on wellsfargo.com we want these to say, “That had been great. I can’t wait to share with someone.”
An alternative choice worth pursuing is widening the associations contained in the customer’s mind. Financial services is a business where associations tend to be conscious, categorized, and hierarchical in comparison to the associations formed in additional heavily branded businesses. Put simply, the (potential) customer usually thinks about a “set” before contemplating an “element” within that set. Like many mental associations, the details could be returned either in direction. For example, the consumer may normally think “banks” after which think “Wells Fargo”, but is likewise capable of return the word “bank” if prompted with the name “Wells Fargo”. This categorization is important, mainly because it provides (limited) permission for Wells Fargo to grow its mind share horizontally (across service categories).
To put it differently, providing a diverse variety of financial services doesn’t simply make sense through the provider’s perspective, in addition, it is a good idea from the user’s perspective, as the user of financial services has grouped deposits, borrowing, bank cards, insurance, brokerage services, asset management, etc. together in a very loose way within his mind. Because of this mental network, one positive exposure to Wells Fargo will greatly affect a customer’s desire to pay for an additional service, even if your two services will not be really all of that similar.
The three important elements listed below are: a broader concise explanation of what Wells Fargo is (a location that does “money things”, not only a bank), a good experience, and a few sense of trust that the grade of service is going to be consistent. The last requirement will be the easiest to fulfill, because it’s natural to get a customer to assume the positive experience was not a fluke, much the way a diner assumes the great meal he had at the particular restaurant had not been a result of his picking the ideal offering from the menu. The diner usually assumes the complete quality of the restaurant’s various entrees is superior. Likewise, a good knowledge of one of Wells Fargo’s products will more than likely rub off on its other offerings.
Shares of Wells Fargo currently yield approximately 3%. The stock trades at a price-to-book ratio of just under 2.75 plus a price-to-earnings ratio of below 15.
Over the past 5, 10, 15, and two decades shareholders of Wells Fargo & Company have fared much better than the S&P 500. By the end of just last year, WFC’s total return throughout the last decade was 17% vs. 9% for your S&P. Over the past 20 years, WFC outpaced the S&P 500 by a much wider margin: 21% vs. 12%.
Wells Fargo includes a stellar reputation with investors. The company is the only U.S. bank to earn Moody’s highest credit score. Wells Fargo also has a famous major shareholder. The biggest owner of your company’s common stock is Berkshire Hathaway. Warren Buffett’s holding company carries a roughly 5.5% stake in Wells Fargo. Berkshire’s last reported purchase occurred through the first quarter of this year.
Wells Fargo features a stated goal of achieving double-digit development in earnings and revenue while running a return on assets over 1.75% along with a return on equity over 20%. Those are very ambitious goals. The company has achieved some of the highest returns on assets and equity for any major U.S. bank. However, Wells Fargo probably will must increase the number of revenue it derives from fee businesses should it be to obtain these goals.
Inside the years ahead, the organization may well become more of any diversified financial services business. The truth is, that’s things i expect will occur. The company’s resolve for cross-selling will not be some fad. Eventually, this commitment will alter how investors think of Wells Fargo. Soon, it could be considered much greater than a bank.
Wells Fargo’s CEO helps make the case that his company’s P/E is actually too low. Wells Fargo has a solid reputation of strong growth and profitability. So, why must it be valued similarly to many other banks? Shouldn’t it be awarded a multiple more in step with a growth company?
There’s actually some merit for this argument. Wells Fargo is unusually well positioned for the bank. Often, those banks that seem sure to earn extremely high returns on assets and equity for several years to come are poorly positioned for future growth. These banks are usually smaller than their competitors and focused entirely on a certain geographic niche. Any acquisitions would dilute the exceptional profitability from the bank’s niche.
Of course, additionally, there are many consolidators in the banking industry. Unfortunately, many of these banks do not have a history of earning the sort of returns on assets and equity that Wells Fargo has achieved. More importantly, there is very little differentiation between these titans in the banking industry as well as their national competitors. Therefore, their moats are highly suspect.
Wells Fargo is actually a different form of bank. It has a past of extraordinary growth and profitability. The two main obvious opportunities for future growth: geographic expansion and cross-selling. Of the two opportunities, it’s clear I’m more enamored using the latter. An eastward push is not required, and definitely not via an ill-advised acquisition.
There is a lot of worth within the Wells Fargo franchise there is plenty of room within that franchise for future growth. That’s one from the great features of the financial services industry. With the right model, limits to growth are almost non-existent. In other highly-profitable industries, there may be often nowhere to reinvest new capital at a similar rate of return.
If Wells Fargo is a growth stock, it is a peculiar kind of growth stock. Maybe that is what attracted Buffett towards the company to start with. What follows is a business having a strong franchise that will grow for several years into the future. Perhaps most importantly, this is a growth business that frequently trades in the marketplace at value like multiples, due to the fact it’s a bank.
In the current selling price, Wells Fargo is the sort of investment you will be making once and forget. The valuation is not so cheap with regards to promise an effective return in the event the business falters. But, the company is not so suspect with regards to require the margin of safety be provided by the lowest P/E ratio. Sometimes, near certain growth is definitely the margin of safety.
On the separate topic, I’d love to encourage a person with a desire for competitive advantages to read the entire “Vision and Values” area of the http://headquartersnumbers.com/wells-fargo-customer-service-phone-number-contacts/ site.
Superficially, it appears as with any other online presentation to investors. Actually, it really is nothing like those hollow, sugary slide shows. It’s actually an engaging exploration of competitive advantages in an industry that seems totally unlike the type of branded, consumer-oriented businesses one normally associates with strong franchises. Even though you aren’t considering the banking industry specifically, I recommend looking at this section for the insights into customer psychology and behavior.