Wells Fargo, a major holding once praised by Buffett and Munger

Wells Fargo

Company profile

Berkshire Hathaway (NYSE: BRK.A and BRK.B) started buying Wells Fargo stock in 1990, a story worth mentioning.

Carl Reichart’s contribution

Wells Fargo’s former chairman Carl. Leicester (Carl Reichart), known for his ability to cut costs in a profligate industry. That fact alone ensures Wells Fargo’s long-term profitability outperforms most banks. The California stronghold, however, is puzzling because the U.S. economy was entering a recession at the time, and California, which has been one of the biggest beneficiaries of the forward boom, is likely to suffer more than much of the rest of the country.

Buffett approves of Wells Fargo’s California bet

In Berkshire’s 1990 annual report, Wells Fargo was Berkshire’s sixth-largest holding at the time, and Buffett also considered these issues. The first risk he mentioned was the California earthquake. The more pressing concern, he said, was an economic contraction or financial panic that would all but jeopardize newly highly leveraged institutions, no matter how well-managed they were.

The last concern he mentions is very close to reality, and that is the collapse of real estate values and mortgages. In California, in particular, he said, “Many people think Wells Fargo is very vulnerable.” He goes on to point out that losses on such highly leveraged (mostly real estate mortgages) could wipe out 1991 gains, which is not necessarily the case. It’s not impossible, but he said the odds are low, and even if it did happen, he wouldn’t be upset. Because very few other companies at the time could earn 20% from an ever-increasing stake.

Most banks will “early recognize” all bad debts. Wells Fargo did the same, and as a result, earnings disappeared and, even more frustratingly, dividends cut. After the Persian Gulf War, shares rose over $100 in early 1991, but later fell to $57 in mid-1992. The return on equity for that year was only 14%, not 20%. Even so, the banking sector is clearly in recovery mode, with dividends recovering quickly, but at lower levels than in the past.

Prove Buffett’s outlook right

But Buffett’s outlook is more accurate, and the long-term outlook is more important. Returns on shareholders’ equity after 1994 have returned to 15% to 20%. The California stronghold was always at a disadvantage in the 1990s, but had a big advantage in the late 1990s because there were fewer competitors, at least no local competitors, because Bank of America (ticker: BAC ) was not doing well at the time.

Wells Fargo goes downhill with Leicester’s retirement

Carl. After Lester retired, Wells Fargo was ambitious in 1996, spending too much on the acquisition of California’s First Interstate. In 1998, Minneapolis-based Norwest Corporation acquired Wells Fargo, and the combined company was renamed Wells Fargo Group.

Business and stock performance

Main business

The revenue performance of each segment in 2021 is as follows:

SegmentNumber ($ million)
Consumer banking and landing34,877
Commercial banking8,549
Corp and Investment banking13,839
Wealth and investment management14,346
Reconciling items1,614
Total revenue78,492 +5.69%

2021 financial performance

ItemNumber ($ million)
Total revenue78,492 +5.69%
Pre-tax pre-provision profit (PTPP)24,661 +48.26%
Provision for credit losses(4,155)
Net income21,548 +538.08%
Market capitalization186,441
Book value per common share43.32
Debt securities537,531
Allowance for loan losses12,490

Market valuation

2021JPMorgan ChaseBank of AmericaWells FargoCitigroup 
Market capitalization ($ billion)361.68299.15167.8898.82
Share price123.0337.1344.1650.1
Dividend yield3.25%2.26%2.26%4.07%
Total asset ($ billion)3,743.5673,169.4951,948.0682,291.413

Past reputation

Christmas tree case

I mentioned it 2-3 at the end of my book “The Rules of Super Growth Stocks Investing”, Carl. Munger praised Lester for asking the CEO to pay for the Christmas tree, and Berkshire increased his stake in Wells Fargo for it.

The fake account

I blog “How serious is the problem of misappropriating client funds in Taiwan?” also mentioned that the fake account incident of Wells Fargo is the main reason why Buffett’s Berkshire has cleared the fourth-largest holdings that have been publicly announced this year.

Why did Buffett make the decision to dump all his holdings? Because he said, “When you start looking around, there’s never just one cockroach in the kitchen.”

Wells Fargo
Credit: Wikimedia

Reputation is priceless

This is what Warren Buffett said, “It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you’ll do things differently.” good picture.


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