Filed Under: WFC,
It�s no secret I�m an aficionado of the letters to shareholders CEOs write every year for inclusion at the beginning of their companies� annual reports. They are a terrific opportunity for a CEO to step back from the day-to-day details of running his business to review the year just past, and to discuss the key issues and problems he sees ahead. (This doesn�t mean I think most CEO letters are actually good, by the way. Most aren�t. Still, there�s nothing like a leaden, clich�-ridden letter, full of self-serving blather explaining away a prior year�s lousy results to serve as a red flag that a given company figures to be a truly lousy investment.)
Anyway, given the disruption the banking industry went through in 2008, I�ve been particularly looking forward to reading this year�s crop of letters. There�s a lot to be discussed, obviously. I�m interested to see which CEOs are truly candid and insightful about what went on, and which take excuse-making and scapegoating to new heights.
It�s early yet, but, so far, I�ve been disappointed. Even the gold standard among CEO letters, the one Warren Buffett writes every year to holders of Berkshire Hathaway (BRK.A), didn�t get into many big issues or discuss the future the way I�d hoped. (I would have liked to read Buffett�s thoughts on the rating agencies, for instance, given Berkshire�s stake in Moody�s (MCO).) I�m definitely looking forward to reading what Jamie Dimon (JPM) has to say. And Bob Wilmers of M&T Bank (MTB), as well. The best letter so far, though, comes from John Stumpf at Wells Fargo (WFC).
I strongly encourage you to read the Wells letter, but not because Stumpf provides any blazing macro insights. That�s not Wells�s game. Rather, Stumpf�s letter is worthwhile because it explains in plain English the principles that make Wells Fargo not just a great banking organization but one of America�s great companies. (And yes, to all you corporate bashers out there, there are still a number of great companies around!) Here are some highlights:
Management keeps it simple. Wells Fargo is a huge organization, both geographically and as measured by the number of banking products it offers. Yet the company is successful largely because, despite its size, it nonetheless manages to keep things simple. If Wells doesn�t understand a product (an option ARM, say) it simply won�t offer it. Stumpf notes that the Wells Fargo vision does not require any complex mathematical models. Tell that to the guys in the financial products division of AIG!
Management is honest. Candid admission of error in CEO letters is rare, yet right up front, Stumpf concedes, �We made some mistakes but kept our credit discipline.� Nor does Stumpf sugarcoat his outlook for the future. �If you�re a pessimist, there�s a lot for you to like about 2009,� he writes. �It will be a rough year for our economy and our industry. Consumer loans will continue under stress, chargeoffs [uncollectible debt] probably will continue to rise.� Contrast that with what you�ll read in letters from banks that lost money in 2008 (which Wells Fargo did not.) You�d never guess they�re buried under problem loans! Wells Fargo is not in denial.
The company wants to build value, not an empire. In 2008, Wells Fargo doubled its assets with the acquisition of Wachovia. But in discussing the deal, Stumpf emphasizes that Wells didn�t do it simply to bulk up. �Size alone means nothing to us,� he writes. Then Stumpf repeats a mantra coined more than a decade ago by his predecessor, Dick Kovacevich: �You don�t get better by getting bigger, you get bigger by getting better�. Somebody please tell that to AIG, Bank of America, and Citigroup!
Management is truly focused on its teammates. In most shareholder letters, CEOs feel the need to buck up the rank and file with some gratuitous comment that �our employees are our greatest asset� or �our people are our greatest competitive strength.� They don�t mean a word of it, of course. Wells Fargo does. The company has long believed it can differentiate itself with superior employee performance; the record of the last 20 years shows that it can�and has. Stumpf writes, �we call them team members (an asset in which to invest), not employees (an expense to be managed).� At Wells, that investment has paid off. According to survey data gathered by Gallup, Wells Fargo�s community banking group has 8.7 team members who say they�re engaged in their work for each team member that�s actively disengaged. This compares with 2.5 engaged-to-disengaged team members five years ago, and a national average of 1.5 to 1. I believe the deep commitment of Wells�s employees is a key factor in the company�s long-term success.
Management is focused on serving costumers. If you read the letter, you can�t help but be impressed with Stumpf�s authentic emphasis on customer service. Wells�s management is proud of the customer experience the company delivered last year. At the same time, Wells knows service levels are a long way from perfect; Stumpf is honest in saying so.
Management is focused on the integration of Wachovia. You might remember that when the Wells Fargo-Norwest merger happened in 1998, management laid out an integration plan that was slated to go more slowly than most other bank-merger integrations of the era. Norwest-Wells management took some heat over the perceived delays. But in the end, Wells Fargo was the only one of the dozen big deals of the time to achieve its earnings objectives in the following two years. The other eleven, meanwhile, missed their initial earnings projections by an average of 13%! Their haste led to service glitches and revenue erosion. By contrast, Wells�s first priority was holding the franchise together and avoiding merger disruption. Stumpf makes it clear that the company is approaching the Wachovia integration the same way it went about integrating Wells Fargo with Norwest. I expect it will have similar success.
Congratulations to John Stumpf for writing an informative letter in plain English. I continue to hope (and wish) to read more that are this good.
Thomas Brown
www.bankstocks.com
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