$WFC WTF

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During their recent episode of the VALUE: After Hours Podcast, Taylor, Brewster, and Carlisle discussed $WFC WTF. Here’s an excerpt from the episode:

Bill: Let’s talk about my favorite stock of the day. We have a bank here that is printing an 81.6% efficiency ratio. For those that don’t know, that sucks.

Tobias: Bill, they’re saying you’re too quiet. I’m not having any problems hearing you, but maybe just get up a bit closer to the mic. No, everybody, something’s going on. I don’t know.

Bill: How’s that? How’s this? Is that louder?

Tobias: Just try closer.

Bill: I can’t get any closer.

Tobias: Little bit further away, closer. Further away. [crosstalk]

Bill: Fine, we’ll go a little higher here. How’s that? All right. Anyway, 82%? efficiency ratio, terrible.

Tobias: What’s that mean?

Bill: It means that their expenses are approximately 82% of their revenues. You want it to be like 55% to 60%, they’re a little high.

Jake: Too many employees.

Tobias: Mate, you work at banks. You don’t invest in them.

Bill: It’s too high, too high. I’m doing this off– like I just did this back of the envelope. If I’m wrong, I’m sorry, but I think I’m right. $35 billion top line, $27.5 billion of expenses gets you to 8 billion pre-provisioned net income this year. $13 billion have provisions for credit losses this year. So, that’s something. It’s not nothing. Gets you to a negative $5 billion post-provision statement. But then I figure, you got to spread the $13 billion of provisions over a credit cycle. That’s not like you just incurred all that today. So, if you normalize it, I still think they’re anywhere between $5 and $7 billion of normalized net income and they think they got $10 billion of costs to take out of the entity. You got that for $98 billion it’s offered.

There’s a lot of shit in it. You got 28% of your loan book is in financials, not banks. So, I’m going to assume that that’s a lot of private equity sponsor lending. You’ve got 6% of your books in retail, 5% yours books in energy. So, you’ve got some risk but you’re looking at 0.8 times tangible book value. Can you recreate that business for 80 cents on the dollar? I don’t think so.

Jake: What do you think about the loss provisioning? You feel like it was conservative, aggressive, accurate?

Bill: My opinion doesn’t matter. Let’s see in five years. Look, I think that there’s a lot of reasons that if I was the CEO, I would be conservative. I don’t know how much he knows. He’s been there for six months. But I do think that generally speaking, commercial banks are not aware a lot of the risk is. And I think that in that entity, the asset capital really screwed them. I have a high degree of confidence that today he sent an email to his employees that echoed what he said on the call today, and I think that there’s a lot of fat that’s going to come out of the organization.

Tobias: It sounds like what he said was there’s a lot of outside that we take on. We’ve got way too many consultants. We’re going to gun the consultants too.

Bill: Yeah, his comment on third-party spend was interesting. He said he’s never seen anything like it. I guess the thing that is– [crosstalk] What?

Jake: –bullish for the economy?

Bill: Yeah, well, I mean, it’s just one company.

Tobias: I tweeted out. There are three comments from– Jonathan Farrow on Bloomberg tweeted out. A series of three comments from the Delta, Wells Fargo, and Jamie Dimon, all saying that the underlying is pretty ugly.

Bill: Yeah, I’m off that United bond idea, hard to switch your mind that quick on credit. But once I saw those flare-ups in the southern states, I think it’s going to be really tough to get TSA throughput up here. You’ve got to pivot when the facts change. [crosstalk] those are deeply subordinated. So, anyway.

Tobias: I’ve got a few good comments for you, Bill, from the crowd. The first one was somebody’s ex-girlfriend worked there and she sucked, so–

Bill: That’s not good.

Tobias: This is the real one.

Bill: She might get fired, so you can take some solace in that.

Tobias: To invert this whole discussion, if you’re a competitor like JPM or Bank of America or a regional competitor, how do you destroy Wells Fargo? How do you compete?

Bill: If you’re regional, I don’t really know. Right now, if you’re JPM or even a super-regional, I think that you can go at them pretty hard because this asset cap is really going to hold them back. I think that where they got really screwed through this cycle is they probably returned too much capital to shareholders. They have an asset cap anyway, so it’s not like they could do a ton to grow. But I think that March happened, everybody drew their line, plopped the assets on the balance sheet. Now, all of a sudden, these deals that you want to go out and do, you’re capped by your asset cap. Now, you’ve got to tell clients that you had deals on the table with, we actually can’t do these deals.

And that is a really bad outcome, especially in banking. You’re only as good as your word. So, if I was anybody, I would be calling up all of their clients and pitching them new bigger deals, because I know that Wells can’t grow. So, they’ve got to get that cap lifted. But this is the age-old investing question. You’re buying it at 80 cents on the dollar a book, you could pay one and a half times book for JP Morgan. Microsoft was a dead piece of crap company too, not all that long ago.

Tobias: 10 years.

Bill: Wells is not Microsoft.

Tobias: You’re old, mate, 10 years is a long time. I’m just teasing.

Bill: No, I know, but it’s a five-year thesis. It’s going to be ugly. I guess the thing that is difficult is the difference between like Charter and TransDigm to me is Charter was a one-time hiccup. They were otherwise executing. TransDigm, I got my head around. Wells, you have consistent underperformance, and that is harder to bet on turning around. You basically have to say management’s turning over and now it’s a new leaf. I don’t know, but, man, the downside here from this price level just doesn’t seem huge. Famous last words.

Tobias: Yeah, I got up on the screen, you can’t see it, but I got Bank of America got to 0.4 price to tangible book back in circa 2011 when they were the whipping boy.

Bill: Yeah, well, but now, where are they?

Tobias: Yeah. Still cheap.

Bill: So, whipping boy can change.

Tobias: Yeah, I think that’s the right thing to do. You get new management in. He’s going to clean house. He’s also going to big bath the first quarter so it’s going to look much, much worse than it actually is. So, then he can be the big hero as it goes along. And it’s probably cheap and it’s a pretty good company. I don’t see how– everything bad is already priced into it. And it probably is looking a lot worse than it actually is.

Bill: Or it might be that bad. I do think this is part of the issue with value when you– fundamentally, banking is a fairly decent business. You don’t control your pricing, but you do have recurring revenue. You’ve got sticky relationships. There’s a lot of good things about it. If you’re buying it at a discount, it probably looks pretty ugly to everybody else too. Then, when you have to listen to the call and see the results, you sort of throw up a little. But that’s why the price is where it is. How much optimism is in the price? That’s the question.

Tobias: I agree.

Bill: I will argue not much.

Tobias: Now my volume is too high.

Bill: I think Jake’s too low. I don’t know, whatever. You don’t like it. Get out of here.

[laughter]

Tobias: It might be me who leaves.

Bill: [crosstalk] stay away too long because eventually we want to have that Twizzler that Toby has promised us.

Tobias: [laughs] You collected in Omaha, you’ve got to be there for the Twizzler in Omaha.

Bill: Look forward to it.

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