SAN FRANCISCO (
) -- As the gigantic bank on Main Street, it can sometimes be challenging for
to impress Wall Street.
The bank is slated to release its second-quarter report before Wednesday's opening bell. If bulls end up disappointed by the numbers, it will probably be because management talks more about fundamental value and long-term goals than the short-term profit making that drives short-term stock bumps.
At a recent conference, Stumpf was discussing the culture at Wells Fargo -- the simplicity and consistency of its business model for at least the past 30 years. The bank doesn't have branches, it has "stores"; and its "cross-selling" pitch to Wall Street is one that aims to satisfy customers with a one-stop shopping locale for financial services.
"You get happier customers, happier team members, more revenue and less turnover," he concluded.
"These things sound soft to Wall Street," Sanford Bernstein analyst John McDonald shot back.
But investors have to look past the branding campaign and fluffy words to discover whether Wells Fargo's business model makes sense any longer -- and whether management can grow shareholder value within their investment time frame.
On the plus side: Wells Fargo is the No. 1 small-business lender and No. 1 mortgage servicer in the country, with the largest branch network. It also inherited a huge retail-brokerage force with its Wachovia acquisition, and kept certain parts of its investment-banking business.
That means Wells Fargo has relationships with one in six U.S. households -- very large, but with room to grow, particularly in areas that it has not had strength in historically.
On the negative side: Its top cash-generator, housing, has been suffering and demand for business loans hasn't been strong. A report from the Mortgage Bankers Association on Tuesday showed that servicer profits declined 44% during the first quarter -- which was still seen as a strong period -- and things appear to have gotten worse since then.
Furthermore, interest rates have remained low for longer than the industry expected. That means the hedging strategy Wells Fargo has used to boost results may have faltered if management wasn't nimble enough to keep up with the trends.
Finally, Wells Fargo will face elevated costs because of a decision to axe its consumer-finance business, as well as ongoing costs from the Wachovia integration.
Bank of America's
report last week -- with dire predictions of the impact of the Durbin interchange amendment -- bodes poorly for Wells Fargo as well, since the bank is the No. 2 debit-card issuer in the United States.
All of that combined indicates that Wells may not be able to deliver the top-line results Wall Street craves. Here's a look at what to expect from Wells Fargo's report on Wednesday:
Analysts are looking for earnings of $2.5 billion, or 48 cents per share, from Wells in the second quarter, according to
. It's a drop from the year-ago equivalent period when Wells reported a profit of $3.2 billion, $2.6 billion of which was for common shareholders, since the Treasury Department still held a significant amount of preferred stock in the firm.
Wells Fargo has beat Wall Street earnings expectations for seven of the last eight quarters, but that hasn't always translated into a bump in the stock.
In the first quarter of 2009, Wells Fargo pre-reported a startlingly huge profit beat, sending bank stocks up from the lows of March. But then in the
third-quarters, concerns about credit quality and costs wouldn't abate.
Though the bank managed to pay back TARP funds and still beat earnings expectations, Wall Street wasn't too impressed by
first-quarter 2010 results, either.
Judging from second-quarter reports from other large banks, the bottom-line may mean less than revenue -- or any hard indications of when and how banks will be able to grow their businesses again.
The Street expects Wells Fargo brought in $21.4 billion worth of revenue in the June quarter -- flat with its performance in the March quarter and down about 5% from the year-ago equivalent period.
If that is, in fact, correct, it wouldn't be bad for a bank facing major headwinds in its bread-and-butter business of lending.
The initial expiration of the Obama administration's tax credit in April led to an early pile-on for mortgage servicing in both new loans and refinancing. Since then, business has been incredibly slow with new home sales falling off a cliff, existing home sales declining and prices facing continued pressure across the country.
Indeed, Bank of America management spoke more about second-quarter short sales, foreclosures and liquidations than it did about new opportunities in lending. And while credit metrics improved for Bank of America, as well as
, none of their outlooks sounded incredibly optimistic.
Wells sees big opportunity in small-to-mid-market business lending, and has been the top lender in that space for some time. But if management comments were any indication, other banks have caught on to the trend -- meaning Wells is facing not just meek demand from quality borrowers, but heavier competition than in the past.
There's ample opportunity for Wells Fargo to seize new wealth management clients, as investors seek out money managers they can trust to protect their funds and produce higher returns. There's also opportunity in investment banking, but so far the Wells-Wachovia franchise has yet to make a splash.
Market volatility hit a fever pitch in the second quarter, spooking traders and limiting demand for investment banking services, anyway. Overall, it's not likely that a relative newcomer like Wells Fargo relied on the capital markets to plug revenue gaps.
Wells Fargo's stock had a reputation for being more resilient than other big banks during the crisis, but lately that hasn't been the case.
Over the second quarter, Wells Fargo shares lost 18% of their value, closing at $25.60 on June 30. Following an industry trend, the stock hit a near-term low of $24.60 on July 1 and has struggled to recover in fits and starts since then.
So far this year, Wells Fargo is down more than 3%. That's good for second-best performance among the four money-center banks in 2010, behind Citigroup's 20% gain. But since April 15, when big bank stocks started to nosedive, Wells Fargo has underperformed both Citigroup and JPMorgan.
Bank of America's dour tone about the costs of regulatory reform last Friday has stoked fear and uncertainty about the future of big banks, along with a lack of hard information from Citigroup and JPMorgan about their respective expectations.
Bank of America set a precedent by outlining specific cost and write-down estimates. Investors may be paying closer attention to what -- if anything -- Wells Fargo management discloses about how reform measures will impact its businesses.
So far, Wells has indicated that reform
won't have much effect, since it is
conservative in its underwriting standards and has stepped away from profit-driven trading and
unsavory practices that competitors embraced, and that are now being targeted by reform.
Yet actions may speak louder than words: After the Dodd-Frank bill passed, Wells
closed down a consumer-finance business that had provided financial services to low-income Americans for more than 100 years.
Wells Fargo management had a reputation for being tight-lipped and above the fray. But since John Stumpf (above) took the reins from former CEO Dick Kovacevich in 2008 -- and took on the full title of chairman and CEO in January -- things have started to change, slowly but surely.
The bank seems to have become a lot more sensitive to what The Street wants and expects. Management began holding conference calls for the first time ever last quarter, as well as an investor conference in May. Stumpf has also been showing subtle differences in leadership from Kovacevich, who was known for "real talk" on Wall Street - regardless of how popular it was - and wasn't afraid to tell
regulators to shove it.
Speaking of an about-face decision to retain some parts of Wachovia's investment banking division, Stumpf noted last month: "My predecessor would always talk about, 'This is not compatible.' Again, that industry has changed a lot."
Still, Stumpf maintains something of a small-town mentality among the ranks of those leading behemoth banks. He grew up on his family's farm in Pierz, Minn., and spent decades working up the ranks of Wells Fargo's predecessor, Norwest. He was first a loan officer and then held various regional management positions before entering the executive suite.
Still, Stumpf maintains something of a small-town mentality among the ranks of those leading behemoth banks. He grew up on his family's farm in Pierz, Minn., and spent decades working up the ranks of Wells Fargo's predecessor, Norwest, as a loan officer and through various regional management positions. On the last earnings conference call, Stumpf sounded sympathetic to troubled homeowners, revealing that he
had once been underwater on his mortgage, too.
"I am from the back 40," Stumpf said recently. "I grew up on a farm. So Main Street -- that's pretty big for me already. We like Main Street."
Stumpf's tendency to be respectful, traditional and camera-shy has often allowed CFO Howard Atkins to steal the show. A relative newbie to Wells Fargo with a decade experience vs. other managers' 20-to-30 year tenure, Atkins isn't afraid to be boastful about Wells' business model and earnings potential. He may be the man tasked with delivering the bull case for Wall Street, while Stumpf delivers the bad news about Main Street.
-- Written by Lauren Tara LaCapra in New York
Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.