CNBC: Why Warren Buffett Likes Wells Fargo: They Didn"t Follow the "Dumb" Crowd

By: Alex Crippen

Executive Producer

Warren Buffett says you should judge a banker by how they bank, not by their speeches or PR: "It"s what they do and what they don"t do. And what Wells (Fargo) didn"t do is what defines their greatness."

Buffett tells Fortune"s Adam Lashinsky that Wells didn"t do "dumb things" just because all the other banks were doing them:

"Those guys have gone their own way. That doesn"t mean that everything they"ve done has been right. But they"ve never felt compelled to do anything because other banks were doing it, and that"s how banks get in trouble, when they say, "Everybody else is doing it, why shouldn"t I?"...

"In the end banking is a very good business unless you do dumb things. You get your money extraordinarily cheap and you don"t have to do dumb things. But periodically banks do it, and they do it as a flock."

Wells Fargo Chairman Richard Kovacevich

Buffett gives a lot of the credit to Wells Fargo Chairman Dick Kovacevich:

"Wells just has a whole different attitude. That"s why Kovacevich calls them retail stores. He doesn"t even like the word banking. I mean, he is looking to have a maximum enduring relationship with many, many millions of people. Tens of millions. And at the base of it involves getting money in very cheap. When you do that that"s a helluva start in the business. The difference between getting your money at 1-1/2% and 2-1/2% on a trillion-dollar asset base is $10 billion a year. It"s hard to overemphasize that. He thinks more like (Wal-Mart founder) Sam Walton than he thinks like J.P. Morgan. I"m talking about the individual there. He"s a retailer. He"s not trying to influence Washington or be the most important guy on the scene or anything like that. He"s just trying to do business with millions of people every day and make a few bucks off of them.

Lashinsky spoke by phone with Buffett on March 26 for a profile of the bank also running in the current issue. Buffett"s Berkshire is the biggest shareholder of Wells Fargo, with almost seven percent of the outstanding stock.

As for the other banks in Berkshire Hathaway"s portfolio, Buffett tells Fortune:

"We own stock in four banks: USB, Wells, M&T, and SunTrust. SunTrust I don"t know about because South Florida is going to be the last to come back, and they"ve got a concentration down there. The other three, they"re going to have a lousy year, but they"ll come out of it with far more earnings power. The deposits are flowing in. The spreads are wide. It"s a helluva good business."

Why didn"t Buffett include Bank of America when he told Fortune "We own stock in four banks: USB, Wells, M&T, and SunTrust."

(As of December 31, according to its Q4 SEC filing, Berkshire owned 5 million shares of Bank of America, which would currently be worth about $45 million. Is that small enough to escape Buffett"s attention, not worth mentioning, or did Berkshire possibly sell that stake since the end of the year? Berkshire"s stake in B of A did get cut by 45 percent, from 9.1 million shares to 5 million shares between June 30 and September 30 of last year.

UPDATE: Warren Buffett Resolves the "Mystery" of the "Missing" Bank of America Stake.)

Buffett"s comments on favorable spreads for the banks right now echo what he told us when he was live on CNBC last month. (See the WBW post: This Is Why Warren Buffett Says It"s a "Great Time to Be in Banking")

Current stock prices:

Berkshire Class A: [US;BRK.A 88700.0 -1600.00 (-1.77%) ]

Berkshire Class B: [US;BRK.B 2920.1 -91.90 (-3.05%) ]

Wells Fargo: [WFC 17.73 -2.53 (-12.49%) ]

USB: [USB 16.65 -1.95 (-10.48%) ]

M&T: [MTB 53.93 -6.04 (-10.07%) ]

SunTrust: [STI 14.79 -3.25 (-18.02%) ]

Bank of America: [BAC 8.2605 -2.3395 (-22.07%) ]

Related Links

Share Investor Blog - Stockmarket & Business commentary
Share Investor New Zealand Business News- Get more business news
Discuss this topic @ Shareinvestor.net.nz
Share Investor"s Daily Forex Updates

Recommended Amazon Reading

The Intelligent Investor: The Definitive Book on Value Investing. A Book of Practical Counsel (Revised Edition) by Benjamin Graham
Buy new: $14.95 / Used from: $9.89
Usually ships in 24 hours

Kindle 2: Amazon"s New Wireless Reading Device (Latest Generation)

BLOOMBERG: Analyst says Wells Fargo may need to raise $10 billion, cut dividend

Wells Fargo & Co., the biggest U.S. bank by stock-market value, may need to raise $10 billion and cut its dividend after the acquisition of Wachovia Corp., wrote Atlantic Equities analyst Richard Staite.

Staite, based in London, downgraded Wells Fargo to "underweight" from "neutral" Wednesday and said the bank may announce disappointing earnings this year because of the deteriorating economy. Wells Fargo reports fourth-quarter earnings on Jan. 28.

"With the accelerating decline in house prices in California and surge in unemployment we expect them to suffer significant losses in 2009," Staite wrote. "Given the weak economic outlook, there is a chance the dividend could be cut as a way to conserve capital."

Wells Fargo"s shares have outperformed those of its top competitors, including J.P. Morgan Chase & Co., Citigroup Inc. and Bank of America Corp., in the past year because the company avoided most of the riskiest loans during the credit bubble.

Dividend rose last year

The San Francisco-based bank bolstered its quarterly dividend by 10 percent in 2008 to 34 cents a share, while New York-based Citigroup and Charlotte, N.C.-based Bank of America slashed theirs.

By ARI LEVY, Bloomberg News

Last update: January 14, 2009 - 7:56 PM

Wells Fargo spokeswoman Julia Tunis Bernard said the company doesn"t comment on analyst reports.

The bank, whose biggest shareholder is Warren Buffett"s Berkshire Hathaway Inc., completed the $12.7 billion purchase of Charlotte, N.C.-based Wachovia on Jan. 1. In the three months since the companies agreed to the deal, economists" average for unemployment have risen to 8 percent by the third quarter from 6.2 percent, Bloomberg surveys show.

Moody"s Investors Service cut Wells Fargo"s debt rating to Aa3 from Aa1 on Jan. 6 on concern that the Wachovia deal will hurt earnings. The deal "significantly weakened" Wells Fargo"s capital position, Moody"s said.

Staite wrote Wednesday that Wells Fargo"s capital ratios have "deteriorated significantly" because of the acquisition.

Related Links

Political Animal - New Zealand Politics
Share Investor Blog - Stockmarket & Business commentary
Share Investor New Zealand Business News- Get more business news
Shareinvestorforum.com - Discuss this topic further



Stagecoach: Wells Fargo and the American West by Philip L. Fradkin
Buy new: $18.85 / Used from: $4.51
Usually ships in 24 hours



The Snowball: Warren Buffett and the Business of Life by Alice Schroeder
Buy new from $19.25 @ Amazon.com

GURUFOCUS: Wells Fargo & Company: John Stumpf"s Letter to Shareholders Is a Must-Read

Mar. 23, 2009 | Filed Under: WFC,



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



Related Links



Berkshire Hathaway Annual Letter to Shareholders 2008 - Read the latest Berkshire Letter

Daily Forex Updates - Daily Forex data, commentary & tools to help make trading Forex easy

Share Investor Blog - Stockmarket & Business commentary

Share Investor New Zealand Business News- Get more business news

Shareinvestorforum.com - Discuss this topic further

Recommended Amazon Reading

Warren Buffett and the Interpretation of Financial Statements: The Search for the Company with a Durable Competitive Advantage by Mary Buffett

Buy new: $16.47 / Used from: $14.01

Usually ships in 24 hours



Kindle 2: Amazon"s New Wireless Reading Device (Latest Generation)