Wells Fargo is by and large considered the best in breed of all the major US banks. Warren Buffett is certainly an outspoken fan of the company. But outside of a few investment managers who periodically sing the bank's praises, Wells tends to stay out of the spotlight (which over the past five years is a definite positive, see here, here, and here for just a few examples).
The bank sidesteps the glitz and glam of high flying Wall Street and in the process they somehow outperform the other mega banks, JPMorgan Chase , Bank of America , and Citigroup .
To get to the bottom of this, I've compiled 7 charts to try and figure out how exactly they do it. In the end, the answer is simpler than you may think.
Wells Fargo is a big bank, one of only four in the US with total assets greater than $1 trillion (along with JPMorgan, Bank of America, and Citigroup). However, they stand out amongst the big four as having far and away the best top line growth from 2011 to 2012.
Growth is obviously good, but this chart also points out a symptom of another issue with the big banks -- troubled balance sheets. Citigroup and Bank of America specifically are still battling to work out assets and businesses that collapsed during the recession. The poor decisions made in 2004-2006 that led to the Financial Crisis are still preventing these two banks from moving forward, even after five years.
It is also worth noting the other strong performers on this chart, US Bancorp and PNC. These two banks are considered regionals (even though they are the 9th and 12th largest respectively as of Dec. 31, 2012, with over $650 billion combined assets), and like Wells, they were very successful working through the recession and rebounding of late. Take note of the regional bank theme, we'll see it again.
2. Getting Maximum Bang for your Buck
Where else does Wells Fargo really stand out? Squeezing every penny out of the assets on the books. In the industry, Wells is known as the preeminent cross-selling institution, and this is where that bears fruit.
Compared to the other $1 trillion+ banks, Wells produces nearly a third more dollars of revenue per dollar of assets than second place JPMorgan.
Before seeing this chart, you may have said, "Maybe overall they squeeze more revenue, but no way Wells competes on fee productivity without being big in investment banking like JPM, BAC, or C!"
But the reality is that Wells is not only able to compete, but once again win. The key is their dominance in the small business and consumer mortgage sectors -- driven by robust fee income from mortgage originations and from the "Wells Fargo Advisors" investment management business.
Barlow Research Associates published a report this week detailing market share in the small business and middle market segments. The conclusion? Overall the big banks are losing market share to smaller institutions (like community banks), but Wells Fargo is holding its ground. Wells maintained a constant 10% of the small business market over the past 10 years and currently holds an industry leading 10% market share of the middle markets.
Again, the data indicates that an old-fashioned style of commercial and retail banking is outperforming the glitz and glamour of Wall Street. Just like the regional banks and community banks, Wells' focus is on cross-selling loan, deposit, and cash management products between the consumer at home, the small business, and the middle market.
It almost seems too simple, but the numbers prove it out. Old-fashion banking is winning in the marketplace today.
3. The Markets Don't Like Surprises
Standard deviation, put simply, is a measure of how consistent and predictable an outcome is. A low standard deviation indicates low volatility, while a high standard deviation means that anything could happen.
What this chart illustrates is that over the past four full calendar years, only JPMorgan has a more consistent and predictable ROA from quarter to quarter.
Why is that important? Its important because no one is ever caught off guard with wild swings, positive or negative. It doesn't cause a stir. It doesn't rattle the cages of the market.
Think back to the wild ride some of these banks have had since the recession ended and how they have managed through: it distracts management, it hurts the bank's reputation in the marketplace, and most significantly it causes the bank to backpedal and play defense.