Wells Fargo & Company (Wells Fargo) is a diversified financial holding company, providing retail, commercial and corporate banking services through banking stores located in 24 states of the US. Wells Fargo is a US based diversified financial services company offering banking, insurance, investments, mortgage and consumer finance through its sales and distribution network across North America.The company leverages its wide distribution network to gain strong market position. Cross selling also gives the company—as an aggregator—a significant cost advantage over few products or single channel companies. However, ongoing consolidation in the US financial services industry can create bigger rivals with even more diversified businesses, increasing competition in the market.
Wide distribution network
Diversified earnings distribution across
Strong Credit discipline
Weakening asset quality amidst high real
Limited international presence
Low customer satisfaction
Technology enabled offerings
Growing immigrant population
Growth in the commercial banking industry
Consolidation in the US banking industry Regulations on contingent commission Rising incidents of Online Scams Meltdown in US Asset backed Securities market
Wide Distribution Network
Wells Fargo is a US based diversified financial services company offering banking, insurance, investments, mortgage and consumer finance through its sales and distribution network across North America. Wide distribution network is the chief strength of Wells Fargo that enabled it to become the thirteenth largest financial services firm in the US.
Wells Fargo owns the largest number of mortgage stores (2,400) in the US. Wells Fargo operates the third largest number of banking stores (3,318 stores in 23 states). It also operates the second largest number of stores (banking and non-banking put together).The bank owns 567 supermarket stores and 1,078 consumer finance stores. It has one of nation’s largest telephone banking networks with a call frequency of 20 million calls monthly. Wells Fargo is the third largest branded bank ATM owner (6,900 ATMs).
Wells Fargo commands the largest personal credit market share in Wells Fargo’s banking states. Wells Fargo ranks number two among the debit card issuers in the US; number two among the prime home-equity lenders; and number two among the mutual fund families run by US banks.
Wide distribution network enables Wells Fargo to gain strong market position. For instance, as of June 30, 2007, Wells Fargo was ranked fourth among the bank holding companies based on total domestic deposits, ahead of Citigroup and SunTrust Bank. Among the commercial banks and savings institutions, Wells Fargo ranked fourth based on domestic deposits, ahead of Citigroup and Washington Mutual.
The company strives to earn 100% of every customer’s business (consumer and commercial)—with a broad product line including banking, investments, insurance, mortgages, consumer and commercial finance, venture capital, and commercial real estate. It rewards customers for buying more services.
In 2007, Wells Fargo’s wholesale banking achieved a cross-sell ratio of 6.1 products per Wholesale customer relationship (4.9 – five years ago) and 7.6 products per middle-market commercial banking relationship. Almost a third of Wells Fargo’s regional commercial banking offices had more than eight products per relationship. Some averaged more than 10. Similarly, Wells Fargo’s community banking achieved cross-sell of 5.5 products per household (5.2 a year ago, about three, nine years ago). Business banking cross-sell reached 3.5 products. In fact, Wells Fargo is the leader in cross selling. In 2007, Wells Fargo’s cross selling strategy enabled it to grow average loans by 12% (over 2006), core deposits by 13%, assets under management by 14%, mortgage servicing fees by 14%, insurance premiums by 14%, and total non-interest income by 17%. Wells Fargo’s goal in each customer segment is to achieve a cross-sell of eight products per customer, which is currently half of its estimated potential demand. Continued succ
ess in cross selling would enable Wells Fargo to increase top line and bottom lines and more importantly it will enable the bank to safeguard its customer-base. Cross selling also gives the company—as an aggregator—a significant cost advantage over few products or one channel companies.
Diversified Earnings Distribution Across Segments
Wells Fargo is a diversified financial services company offering banking, insurance, investments, mortgage and consumer finance and has interests in over 80 businesses.Wells Fargo CEO Richard Kovacevich stated that diversity is absolutely integral to Wells Fargo’s vision, strategy, and continued success. Diverse lines of business help Wells Fargo satisfy most of its customers’ financial needs and achieve continued revenue and earnings growth. Diverse lines of business help Eerlls Fargo raise the level of cross selling. In fact, Wells Fargo’s earnings diversity is evident from the breakup of earnings by broad business category. As of first quarter of 2008, community banking accounted for 34% of earnings followed by investments & insurance, home mortgage & home equity and specialized lending which accounted for 17% individually; wholesale banking accounted for 9% and consumer finance accounted for the rest of 6%. Earnings diversity enables Wells Fargo reduce earnings volatility.
Strong Credit Discipline
Wells Fargo’s credit quality is strong as endorsed by credit rating agencies. .The company maintained its credit risk discipline reasonably well during the years (2001-2006) of excessive risk taking in financial services industry. Wells Fargo Financial does not use brokers or correspondents in its US debt consolidation business. Unlike many of its competitors, Wells Fargo did not make option adjustable-rate mortgages (ARMs). The company did not make negative amortization ARMs. It offered in only a very few instances, below certain credit scores, stated-income mortgages and low-and no-documentation mortgages. Because of its prudent lending to customers with less than prime credit and its decision not to make negative amortization loans, the company is estimated to have lost between two and four percent in mortgage origination market share from 2004 to 2006. That translates into losing between $60 billion and $120 billion in mortgage originations in 2006 alone. The company was saved from these possible losses as it kept itself relatively insulated from lending to high risk customers.
Unlike many of its competitors, Wells Fargo did not participate to any significant degree in collateralized debt obligations (CDOs), structured investment vehicles (SIVs) to hold assets off its balance sheet, hedge fund financing, off-balance sheet conduits, the underwriting of low-covenant or no-covenant, large, highly leveraged loans and commitments to companies acquired by private equity firms through leveraged buyouts (LBOs).
Due to such prudent lending principles, Wells Fargo Bank, N.A. continued to be rated as ‘Aaa,’ the highest possible credit rating issued by Moody’s Investors Service (Moody’s), and was upgraded in February 2007 to ‘AAA,’ the highest possible credit rating issued by Standard & Poor’s Ratings Services (S&P). Of the more than 1,100 financial institutions and 70 national banking systems covered by S&P globally, this upgrade makes Wells Fargo one of only two banks worldwide to have S&P’s ‘AAA’ credit rating. Wells Fargo Bank, N.A. is now the only US bank to have the highest possible credit rating from both Moody’s and S&P. Good credit quality enables Wells Fargo to raise resources at highly competitive rates, and to negotiate tough credit market conditions favorably.
Weakening Asset Quality Amidst High Real Estate Exposure
Since 1993, Wells Fargo Home Mortgage (or its predecessor) has been the largest retail mortgage originator. This distinction is strength in good times but is a weakness in bad times like the current post subprime crisis period. More so because, Wells Fargo was not in the top ten B&C mortgage originators (B&C refer to low quality and high risk loans) till 2001. Wells Fargo climbed the B&C charts consistently becoming the fourth-largest sub-prime mortgage lender (a volume of $42 billion) in the US, in 2005.
In 2006, Wells Fargo was the top retail mortgage lender, originating $158.48 billion in loans through its retail channel and earning an industry market share of 14.2%. In addition, Wells Fargo grew its servicing portfolio to $1.34 trillion and, with the top ranking in this category, had 13.2% of the US home mortgage servicing market share, up from 11% in 2005. A significant portion of the servicing growth in 2006 came from Wells Fargo’s purchase of Washington Mutual’s entire portfolio of government mortgage servicing and a portion of its conforming, fixed-rate servicing portfolio, with loans totaling approximately $140 billion and representing approximately 1.3 million servicing customers. Along the way, Wells Fargo Home Mortgage became the largest subprime mortgage originator (after including co-issuance) in 2006. With increasing market share mortgage origination and servicing, Wells Fargo’s problem loans increased. Problem loans rose from $1,531 million in 2005 to $2,416 million in 2006, a jump of 57.8%. The problem became even more acute in 2007 when problem loans rose by 60.1% to $3,868 million. Along with rising problem loans Wells Fargo had to raise its loan loss reserves. During 2005-2007, Wells Fargo increased its loan loss reserve by 37.1% from $3,871 million to $5,307 million. At the end of July 2007, Wells Fargo earned the dubious distinction of the second largest foreclosure filer. Nonperforming loans as % of total loans rose from 0.54% in Q1-07 to 0.70% in Q4-07 and then to 0.84% in Q1-08. Simultaneously, Net charge-offs as % of average total loans rose from 0.90% in Q1-07 to 1.28% in Q4-07 and then to 1.60% in Q1-08.The trend in Wells Fargo’s charge-offs is expected to continue in the coming quarters exerting pressure on its bottom-line.
Limited International Presence
For a financial services organization of its size, lack of international exposure is a weakness for Wells Fargo. The US, accounted for almost 100% of its total assets ($575.44 billion) as at the end of December 2007. At the end of 2007, Wells Fargo’s earning assets amounted to $445.92 million or 77.5% of total assets. Loans in foreign offices accounted for only 1.6% of earning assets of the company at the end of December 2007. At the same time, deposits in foreign offices accounted for 8.2% of earning assets in 2007. Had Wels Fargo achieved a balance between its foreign assets and liabilities it could have to some extent reduced the volatility in earnings. Even within the US also, Wells Fargo is heavily focused on the midwest and the southeast US. It has limited presence in other geographical areas including growing markets in Europe and other Asia-Pacific countries.This makes it highly susceptible to the domestic market fluctuations as well as puts it at a competitive disadvantage against global players such as Citigroup and HSBC with more geographically diversified operations.
Low Customer Satisfaction
Although the customer satisfaction score of Wells Fargo improved over the last three years it is far less than its peers and industry average. According to the 2006, American Customer Satisfaction Index survey customer satisfaction score of Wells Fargo was 72 while the industry average was recorded as 77%. Also the customer satisfaction score of the company is less than Wachovia which recorded score of 80. Around 5.6% of the premier customers leave the company annually. Wells Fargo’s problems regarding customer satisfaction continued in 2008 as well. According to the J.D. Power and Associates 2008 Retail Banking Satisfaction Study, in the Midwest, where Wells Fargo has a high presence, the bank is among those held in the lowest esteem by customers, Of 21 banks in the Midwest Wells Fargo ranked 17th. Wells Fargo’s lower customer satisfaction scores affect its customer retention.
Technology Enabled Offerings
The majority of payments in the US banking system are being conducted through Automated Clearing House (ACH) or networks of check imaging systems, which offer a cost-effective option for lower-dollar amounts. Wells Fargo processed $65 billion in deposits through the check imaging services since installing it. It has processed more than 15 million checks images, currently averaging half a billion dollars per days. Since 2005 the number of businesses using the check imaging system has tripled and the number of checks scanned grew by 500% to more than 8 million. Wells Fargo’s check imaging services include Wells Fargo Electronic Deposit, a completely internet based remote deposit service; Image-Enabled Lockbox Services and Envelope-Free ATMs, which enables conversion and processing of deposited checks as digital images.The market for check image transactions expected to grow to around 2 billion transactions in 2007 from around 720 million in 2006.
Also the bank introduced its ‘CEO Mobile’, mobile service for businesses service, to a select group of customers in May 2007. The company plans to include additional features like wire approvals, image positive pay exceptions, and administrative tools such as password resets in 2007.The banks initiatives to automate its payment process and other services presents it with the opportunity to generate more business from the increasing demand for the internet and mobile banking services as well as improve customer convenience by faster service.
Growing Immigrant Population
The US is fast becoming a hoard of diverse races due to immigration from Latin America, Africa and Asia. At least one of nine American residents is foreign-born. They have accounted for half the growth of the US labor force since 1995 and currently form 15%of the work force. California has become the nation’s first white minority state and home to one of every three Hispanics in the US. One of every four residents in suburban America is ethnically diverse. US Latinos have estimated buying power of $736 billion, African-Americans $723 billion, Asian-Americans $400 billion. Immigrants and ethnic minorities are the fastest growing segment of first-time US home buyers.
To tap these culturally diverse markets the company introduces various programs. Five years ago Wells Fargo promoted the use of the Matricula Consular as a form of identification to help Mexican Nationals move from the risky cash economy to secure, reliable financial services. Later the company has expanded these services to to include immigrants from Guatemala, Argentina and Colombia. Wells Fargo also partners with US consulates and embassies in Asia to offer banking information to Asians preparing to come to the US. More and more of the banking stores of the company are reflecting the culture of their communities in ethnic backgrounds and language skills, in the art and design of those stores. Wells Fargo’s initiatives could enable it to capture the market increasing its presence in the growing cross cultural community.
Growth in the Commercial Banking Industry
Acquisition of Greater Bay Bancorp would increase the company’s presence in the California region. Greater Bay Bancorp, based in East Palo Alto, California, has $7.4 billion in assets, more than 1,800 employees, and serves consumers and businesses from 41 banking locations in and around the San Francisco Bay Area. Also Wells Fargo opened 109 regional banking stores in 2006.
Moreover the US commercial banking industry has been growing continually since the beginning of the decade and is expected to continue growing further at least until 2010. The US commercial banking industry, which generated total revenues of $457.7 billion in 2005, is expected to grow at a compound annual growth rate (CAGR) of 4.6% over the period 2005-2010, and generate total revenues of $572 billion by the end of 2010. Well Fargo’s strong market position in the US banking industry and its acquisitions presents it with the opportunity to grow its market share further as the industry moves up.
The present company is the result of merger/acquisition of nearly 2000 companies. The company continues to pursue its acquisition strategy while it maintains a focus on cross selling strategy.Wells Fargo’s recent acquisitions (2007/2008) include Placer Sierra Bancshares, Greater Bay Bancorp, United Bancorporation Wyoming, Citi customers in NV and CA, CIT Construction, 7 insurance brokerage businesses and Flatiron Credit Company.
Placer Sierra Bancshares is a Northern California-based bank holding company for Placer Sierra Bank, with assets of $2.6 billion and more than 650 employees serving consumers and small- and medium-sized businesses from 50 locations throughout California as of December 31, 2006. Wells Fargo gains access to Placer Sierra Bank’s 32 branches in eight counties of Northern California (Placer, Sacramento, El Dorado, Sierra, Nevada, Amador, San Joaquin and Calaveras) and 18 locations in Southern California.
Greater Bay Bancorp, based in East Palo Alto, Calif., has $7.4 billion in assets, more than 1,800 employees, and serves consumers and businesses from 41 banking locations in and around the San Francisco Bay Area under names such as Mid-Peninsula Bank, Bank of Petaluma, Golden Gate Bank, Coast Commercial Bank, Peninsula Bank of Commerce, Mount Diablo National Bank, and Santa Clara Valley National Bank. Greater Bay Bancorp also owns ABD Insurance and Financial Services, the nation’s 15th largest retail insurance broker with locations throughout the west coast, and Matsco Financial Corporation, a national specialty lender primarily to veterinarians and dentists. The acquisition of Greater Bay Bancorp helps Wells Fargo gain a combined market share of 20.6% in the Greater San Francisco Bay Area Region.
CIT Construction had $2.4 billion in assets and 235 employees as of March 31, 2007.This acquisition is expected to strengthen Wells Fargo’s operations in middle market to large manufacturers in the construction industry. With the acquisition of United Bancorporation Wyoming, Wells Fargo will become the largest bank by both deposits and assets among banks in Wyoming, the nation’s ninth fastest-growing state according to census data (7/2006-7/2007).
The acquisition of Citi customers in NV and CA will further strengthen Wells Fargo’s number one deposit market share in northern Nevada. These acquisitions mentioned above not only bring new customers but also increase the opportunity for cross selling for Wells Fargo.
Consolidation in the US Banking Industry
The US financial services market, being one of the most matured markets worldwide, is featured by intense competition in all fields. The number of institutions reporting to Federal Deposit Insurance Corporation (FDIC) declined to 8,533 at the end of 2007 from 9,181 in 2003. At the end of 2007, the number of FDIC reporting commercial banks declined to 7,282 from 7,770 in 2003. Further, the competitive pressure is growing due to several factors, which includes cross marketing alliances between unaffiliated businesses, as well as consolidation activity in the whole financial services industry. Moreover, global merger and acquisition (M&A) deal value has been increasing indicating higher competitive pressures. For instance, during 2002-2006, the number of deals and value of deals in financial services (including insurance industry) steadily climbed.The number of deals rose to 937 in 2006 from 801 in 2002. In this period, the value of deals also increased to �200.1 billion in 2006 from 60.1 billion in 2002. Global M&A deal value totaled a record $4.5 trillion in 2007, up by 21% from 2006. Deals in financial services industry accounted for 16% of the deal activity in 2007. The deals in financial services industry are expected to increase in 2008 due to the opportunities created by the subprime crisis in the US. Although, Wells Fargo is one of the largest banks in the US, ongoing consolidation can create bigger rivals with even more diversified businesses which could pose a bigger challenge to bank’s market share.
Regulations on Contingent Commission
High profile government investigations, in the vein of Eliot Spitzer’s enquiry into the insurance industry, have cultivated a legislative culture within the insurance industry. Significant financial penalties have been levied to transgressors and new regulations were introduced. Most of the companies have agreed to support legislation banning payment of contingent compensation to brokers. Insurance companies agreed to stop paying contingent commissions in excess casualty lines in any insurance line in the US where 65% tipping test is met. The test provides that if more than 65% of national gross written premium is written by insurers that do not pay contingent compensation, and insurers that have signed settlement agreements with a 65% test, then the carriers with those agreements must stop paying contingent compensation in the next calendar year, once notified by the attorney general.
Acordia/ Wells Fargo Insurance Services, is the fifth largest insurance brokerage in the world. It is the largest bank-owned insurance brokerage in the US, with over 150 offices in 38 states. Its 4,500 insurance professionals place in excess of $8.5 billion of risk premiums with expertise in property, casualty, benefits, international, personal lines and life products. If legislation is brought out banning payment of contingent commission, the company would face decline in profitability from the brokerage business.
Rising Oncidents of Online Scams
There is increasing concern on rising theft associated with online banking.There have been increased instances of fake websites, phishing, brand spoofing and email scams in East Asia. According to the Association of Payment Clearing Services (APACS) the number of recorded phishing incidents rose 16-fold to 5,059 in the first half of 2006 resulting in a loss of GBP23 million. Losses from plastic card fraud amounted to GBP209 million in the first half of 2006.
According to Joel Helgeson, an independent computer security consultant based in Saint Paul, Minn there has been an increase in the risk of systems crash in Wells Fargo due to online scammers. In August 2007, the Anti-Phishing Working Group, an organization that tracks online fraudsters, had counted 43 live Wells Fargo phishing sites. In fact in the fourth week of August 2007, customers complained that completed transactions details were not reflected in their online bank accounts.
Meltdown in US Asset Backed Securities Market
Global financial markets have been volatile over the last two years despite robust earnings over the past few years. Most financial markets underwent a moderate to severe correction in 2007. Early in 2007 the markets picked up well, until the crash of the US sub prime market, which erased almost all the earnings of the year.The sub prime mortgage financial crisis of 2007 was due to a sharp rise in home foreclosures that started in the US during the fall of 2006 and became a global financial crisis within a year.
As of May 2008, global banks have disclosed 80% of forecast losses on subprime mortgage-related assets. It is estimated that Banks will register at least $400 billion losses (or as high as $550 billion) on $1.4 trillion subprime assets. Of this loss, banks have already announced losses of $165 billion on exposures to residential mortgage-backed securities (RMBS) or collateralized debt obligations backed by asset-backed securities (CDOs of ABS). The announcement of these losses especially those that were not factored in by market forces have led to huge drop in shares and indices related to financial services. Problems in credit markets have led to a perception of recession. The affect of the feared recession had an effect in the Asian financial markets. For instance, the popularly tracked Nikkei 225 fell by 16.1% during August 2007 to May 2008. Added to this, the price of oil has been around $130 for the past few months. Volatility in financial markets could lead to rise in cost of funding and value of financial assets held for trading. Consequently, the company’s asset quality, profitability and capital adequacy could be tested in the coming quarters.