Wells Fargo Isn't Too Worried About Reform

At an investor conference last week, Wells Fargo management touted the firm's past success, and provided an outlook for growth that might be less muted than it seems.
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) --

Wells Fargo

(WFC) - Get Report

management has a

tendency to

underpromise and

overdeliver. So when executives say they're targeting 10% annual revenue growth, with a 1.5% return on assets -- as they did last week -- it's a safe bet that their sights are actually set a little higher.

Wells Fargo held an investor conference on Thursday and Friday to let Wall Street know where it's headed. Apparently, management got the hint last year that

staying silent can become a liability: The conference was the first such event in 12 years, and part of a broader strategy to open up the lines of communication at an ordinarily

tight-lipped firm. Wells Fargo only recently began holding live conference calls to discuss quarterly results -- standard protocol for anyone else -- but a new-fangled perk for Wells Fargo shareholders.

Several analysts who attended the event in San Francisco issued glowing reports about Wells Fargo's improving fundamentals, its track record of success, and opportunities for growth. A few outlets reiterated buy ratings on the stock this week. Todd Hagerman, of Collins Stewart, went as far as to say that he found it "difficult to reconcile management's conservative outlook."

"When we begin to consider

Wells' leading low-cost funding platform, leading market share position in less fragmented/more rational banking markets, and greatly expanded distribution breadth/depth over the last two years, our sense is that

Wells' potential operating leverage and profitability targets and understated with room to move higher," he asserted.

Even Rochdale Securities analyst Richard Bove, who maintains a neutral rating on the stock, sounded a little more optimistic.

But while executives are talking more, they're still adhering to the same playbook. They touted the strengths of the Wells Fargo-Wachovia franchise, mentioned cross-selling often, and said that the bank's recent outperformance speaks for itself. They have a simple explanation for bullish operational targets of 10% revenue growth and 1.5% ROA: It's nothing new.

"Our revenue growth has been very consistent at roughly 8% to 10% per year over the decade prior to the Wachovia acquisition," said CFO Howard Atkins. He later noted that over the same period: "Our average ROA was about 1.33%, one of the highest in the industry."

Indeed, even in 2009, at the peak of the credit-loss cycle, Wells Fargo's ROA was roughly 1%. According to

Thomson Reuters

, Wells Fargo's five-year growth record beats the industry by a margin of 5.6 percentage points, and its 10-year growth outpaces competition by 3.2 points.

Among comments from reports of analysts who attended the event: "There were few surprises"; "nothing too shocking"; and management is "sticking with a proven strategy."

Atkins acknowledged investor concerns that it may be difficult to keep up the pace with the addition of Wachovia, which effectively doubled the bank's size. But he noted that Wells Fargo still has below-average costs, above-average returns, and a philosophy of sticking to businesses and risks that it can understand. He believes that growth will be fueled by boosting the cross-sell ratio at Wachovia branches from 4.85 products per household to legacy Wells Fargo's level of 6. Analysts tend to agree.

"In fact, improving the Wachovia cross-sell ratio...ultimately represents a 30% revenue-growth opportunity," says RBC Capital Markets analyst Joe Morford.

Executives also trumpeted Wells Fargo's newly strengthened capital levels, which are higher than ever before, including pre-Wachovia and pre-TARP. Management plans to maintain Tier 1 capital at an 8% minimum, which they say reflects the company's risk profile, as well as the economic environment.

So the real question may be: What's standing in Wells Fargo's way?

Well, for one thing, there's the financial regulatory reform working its way through Congress. Whatever the outcome, it's sure to make the business of banking more costly. CEO John Stumpf highlighted this as one of Wells Fargo's five key challenges. The other four were the ongoing economic downturn, the related slack in loan demand, depleted real-estate values that may take awhile to recover, and the Wachovia merger.

But Stumpf and his management team see Wachovia as an opportunity even more than a challenge. The same can be said of the regulatory reform measures that are worrying competitors so much. Wells Fargo has much less exposure to card fees than competitors like

Bank of America

(BAC) - Get Report


JPMorgan Chase

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(C) - Get Report

, and therefore its revenue will be less depleted by changes to credit card and debit card practices. Wells Fargo also doesn't toy around with

complex over-the-counter derivatives too much, so its exposure there is similarly limited.

"If done right, in a way that protects consumers and encourages banks to focus on serving customers," said Stumpf, "Wells Fargo is in the sweet spot because virtually everything we do starts with the customer."

Or, as Rochdale Securities analyst Richard Bove put it, Stumpf "simply indicated that the bank has been able to thrive in whatever environment it faced during the past 158 years, and it would continue to do so. There is some merit in that view."

-- Written by Lauren Tara LaCapra in New York


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