Wells Fargo (WFC) is the top deposit gatherer in the United States. Its strategy rests on deep customer relationships, sound risk management, and operational excellence. Successful execution of this strategy over decades has resulted in a wide economic moat, clearly evidenced in the company’s financials. Wells Fargo consistently paid less for balance sheet funding than most of its competitors over the past decade, and it has also generated more revenue per dollar of assets than most peers over time. We attribute this low-cost funding to a loyal base of longtime customers--account closures did not spike during the worst of its sales problems, demonstrating that customers are willing to stick with the bank.
Unlike its major competitors, Wells Fargo is not a top player in the capital markets. Its business model is more akin to a regional bank than to a money center institution. According to the Financial Times, Wells Fargo generates less than half the investment banking fees of companies like JPMorgan Chase (JPM), Goldman Sachs (GS), and Bank of America (BAC), and trading revenue makes up only a small percentage of noninterest income. Instead, Wells Fargo relies on the more stable revenue generated by its brokerage, advisory, and asset-management businesses. It competes to a large extent with regional peers, and its scale advantages should grow in importance as technology and compliance spending increase fixed costs across the industry. For this reason, we believe Wells Fargo deserves a lower cost of capital--and higher multiple--than riskier peers.
Eric Compton does not own shares in any of the securities mentioned above. Find out about Morningstar's editorial policies.