Low-Cost Deposits Continue to Flow to Wells Fargo

Total and core deposits both grew by 9% during the year, with Wells Fargo paying only 9 basis points of interest expense on its deposit funding. The company's low-cost deposit base growth remains its key source of competitive advantage, and we believe the company's narrow moat remains intact. The company's recently announced purchase of financial assets from

Wells Fargo's conservative lending standards also help produce returns above the bank's cost of capital. The company charged off only 0.33% of loans during the quarter--considerably better than our current long-term forecasts.

On the efficiency front, Wells is subject to increased regulatory costs like many of its peers, but we are encouraged by the company's relative lack of legal expenses. The company's simple, domestically focused business is clearly not "too big to manage" as the company has thrived under the leadership of several CEOs. Though the company expects its efficiency ratio to be at the high end of its 55%-59% target for 2015, we don't view increases in headcount negatively. Along these lines, Wells Fargo's emphasis on cross-selling is associated with significant incentive spending. We see these expenses as worthwhile in building long-term customer relationships and consequently, switching costs.

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