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Introduction
In order to analyze the banks most effectively, it was important to compare different banks in the same
industry and with similar market capitalizations as Wells Fargo. Because there are stark differences across
banks depending on their market size and industry, those variables needed to be the same for a proper
comparison to occur. With market size and industry held constant, it is easier to examine the differences
between banks. By observing financial statements across similar banks, the various ratios and numericals
that affect the characteristics observed in the CAMELS rating can be analyzed.
History
In 1852, Henry Wells and William Fargo founded Wells Fargo as a financial services company. Their
original operations involved buying and selling gold for bank drafts and offering express delivery services
to customers across the west. Wells Fargo was initially located in the gold rush port of San Francisco and
provided miners during the Gold Rush with financing they would not have otherwise had access to.
Building on their original success as financiers, Wells Fargo expanded operations to include mail delivery
across the western states. They used the fastest means possible and exhausted all forms of mail delivery,
including steamship, telegraph, railroad, stagecoach, and pony rides.
After the transcontinental railroad was completed in 1869, Wells Fargo became the first
nationwide express company. They used the term “Ocean to Ocean” and “Over the Seas” to describe their
services across the US and abroad. All the while, Wells Fargo brought in much business by buying and
selling gold on the market.
By 1918, the US government began to take over the mail services because of World War I. Wells
Fargo saw their operations at the time dwindle to only the original bank in San Francisco. After
overcoming the horrific San Francisco earthquake of 1906, Wells Fargo president I.W. Hellman
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telegraphed a correspondent the following message: “Building destroyed. Vault intact. Credit unaffected.”
This was a foreshadowing of Wells Fargo’s relatively impeccable future in the banking industry despite
the turmoil the economy went through in the 20th century and afterwards. In the 1910s and 1920s, Wells
Fargo expanded operations to include commercial banking activities to finance the auto and aerospace
industry.
Since the early days of its history, Wells Fargo has been an innovator in the industry. They have
embraced the latest forms of transportation to better service their customers and have also embraced the
latest technology to remain competitive in the modern world. ATMs, credit cards, and online banking
have shifted the way banking is done and Wells Fargo has been on the forefront of this adaptation since
its early days.
Wells Fargo has expanded from its roots in San Francisco to become a regional bank in Northern
California. From there, it expanded to service the West, Midwest, and Eastern states. In its history of over
100 years, Wells Fargo has endured, adapted, and conquered while giving customers a secure means of
obtaining financial services.
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is a comprehensive form of capital adequacy management and works in tandem with Tier 1 Common
Capital Ratios and Leverage ratios to give an overall estimate of capital adequacy.
Tier 1 Leverage Ratio: The leverage ratio measures the relationship between a bank’s core capital and
total assets. Calculated by dividing Tier 1 capital ratio by a firm’s average total consolidated assets.
Bank Capital Ratio Projections for “Adverse Situation” 20132015:
Ratio Q4 2013 Q4 2014 Q4 2015
Wells Fargo Tier 1
Common Ratio
10.1 9.3 8.7
Wells Fargo Total
RiskBased Capital
Ratio
14.7 14.4 13.1
Wells Fargo Tier 1
Leverage Ratio
9.2 8.2 7.3
Goldman Sachs Tier 1
Common Ratio
10.2 8.1 7.2
Goldman Sachs Total
RiskBased Capital
Ratio
15.5 13.8 9.2
Goldman Sachs Tier 1
Leverage Ratio
5.9 5.2 4.4
JP Morgan Chase Tier
1 Common Ratio
9.3 8.4 8.3
JP Morgan Chase Total
RiskBased Capital
Ratio
13.0 11.9 10.5
JP Morgan Chase Tier
1 Leverage Ratio
6.2 5.7 5.4
Morgan Stanley Tier 1
Common Ratio
9.8 8.6 8.5
Morgan Stanley Total
RiskBased Capital
Ratio
13.9 13.8 11.0
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Morgan Stanley Tier 1
Leverage Ratio
5.9 5.5 4.9
Citigroup Tier 1
Common Ratio
10.4 9.3 9.3
Citigroup Total
RiskBased Capital
Ratio
14.5 15.1 13.2
Citigroup Tier 1
Leverage Ratio
6.6 7.2 6.6
The Federal Reserve establishes minimum capital ratios for banks in the same asset category according to
the Basel agreements. The following are the minimums for banks in the category of “advanced
approaches.” All banks above are in this same category and therefore have the same minimum ratio
requirements.
Ratio Minimum 2013 Minimum 2014 Minimum 2015
Tier 1 Common Ratio 5% 5% 5%
Total RiskBased
Capital Ratio
8% 8% 8%
Tier 1 Leverage Ratio 3 or 4% 4% 4%
From the above tables, you can verify that Wells Fargo meets the minimum requirements for the three
capital adequacy ratios and therefore is in good condition to absorb any unforeseen losses due to changes
in asset values. Compared to its competitors, Wells Fargo ranks closely in terms of the ratios listed above.
None of the competitors come consistently too close to touching the minimum requirements for these
ratios and therefore are all projected to be adequately capitalized through 2015.
One last ratio can be used to determine capital adequacy.
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Reserves/Nonperforming Loans: The reserves to nonperforming loans ratio is a measure of how
adequately the bank can absorb losses from nonperforming loans. A higher ratio indicates a bank with a
greater degree of capital adequacy.
Bank Name Reserve/NPL Ratio
Wells Fargo 63
JP Morgan 117
Citigroup 168
From above, Wells Fargo ranks lowest among banks seen in this table but still has a high multiple.
Therefore, Wells Fargo is adequately capitalized and well suited to absorb any losses from nonperforming
loans.
SCORE (15): 1
Asset Quality
Asset quality, according to the CAMELS rating system, refers to the credit risk of assets on the portfolio
of the bank as well as any offbalance sheet activities.
Changes in Asset Quality Since Last Quarter:
Wells Fargo has made improvements in its asset quality since last quarter. For example, the “net charge
off” numerical gives us an estimate of the dollar amount of loans that will be considered losses and
therefore will have unrecoverable cash flows. This is a good indication of asset quality and the stability of
cash flows coming from operations. In the most recent quarter, the net charge offs amounted to 650
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million dollars, down 67 million dollars since last quarter. This is a significant improvement in asset
quality.
Furthermore, the net charge off rate was dropped from 0.35 percent to 0.30 percent. Lastly, as a measure
of asset quality, the amount of nonaccrual loans is observed. Nonaccrual loans are loans that aren’t
producing the desired cash flows due to financial difficulties by the borrower and therefore are seen as
low quality loans. From last quarter, nonaccrual loans have dropped 1.5 billion dollars, or 11 percent.
These positive changes in asset quality signify a beneficial trend in Wells Fargo’s balance sheet.
Two more ratios are beneficial in the analysis of asset quality for banks: the nonperforming loans to total
loans ratio and net interest income.
If we compare banks, it is easier to judge the asset quality of Wells Fargo through comparison.
Nonperforming Loans/Total Loans: This ratio indicates the percent of total loans on the balance sheet
that are nonperforming. Nonperforming loans are loans that indicate the borrower is not financially stable
and cannot pay back the full amount of principal and interest.
Bank Name NPLs/Total Loans
Wells Fargo 2.3
JP Morgan 1.6
Citigroup 1.5
As seen above, all banks have a relatively low NPL/Total loan ratio, indicating that they are not making
bad loans that are likely to default on their payments. Furthermore, all banks are well capitalized to
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recover from any losses that may arise from non performing loans due to the high multiple of
reserves/NPLs.
Net Interest Income:
Net interest income is total interest income plus tax benefit from taxexempt income minus total interest
expense. It is a common measure of how much net income is being generated from interest bearing assets.
A high net interest income number is an indication of high asset quality.
Bank Name Net Interest Income (Latest as of 2015)
Wells Fargo 2.74
Bank of America 2.63
Goldman Sachs 1.05
From the data above, it is obvious Wells Fargo has a high net interest income relative to some of its
competitors. Although comparison of asset quality does not indicate true asset quality for an individual
bank, it is useful to make comparisons nonetheless. For the reasons listed above, Wells Fargo has earned a
high score for asset quality.
SCORE (15): 1
Management Quality
Management quality, under the CAMELS rating system, is the ability and willingness of the board of
directors and senior management systems to identify, measure, monitor, and control risks.
Banks must walk a fine line between putting their assets to work and becoming over leveraged. This is
where management's performance is so important. A good manager can mitigate risk and give
shareholders a good return on their investment. One of the effective ways to gauge management is to use
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Return on Assets (ROA), Tangible Book Value and Return on Equity. Graphs below shows the
comparison of Wells Fargo with other banks.
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It can be easily observed that Wells Fargo is the leading bank when it comes to providing return to its
shareholders and satisfying customers. One of the reason behind this high ROA, high Tangible Book
Value and high ROE is the management structure and management policy of Wells Fargo. Wells Fargo is
a customerfocused bank. It has implemented the C.A.R.E. (Consistent. Approachable. Respectful.
Empathetic) model to communicate with customers. The core of Wells Fargo’s management policy is it’s
visionbased strategy of “crossselling”the process of offering customers the products and services that
they need to help them succeed financially. Recently, Wells Fargo improved its strategy by implementing
“ Our Five Strategic Priorities” which includes:
● Putting customers first
● Growing revenue
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● Reducing expenses
● Living our vision and values
● Connecting with communities and stakeholders
There are separate departments in Wells Fargo dedicated to serve each of the above mentioned strategies
and they directly report to the CEO of Wells Fargo.
SCORE(15): 2
Earnings
Earnings analysis observes trends and quantity of earnings as well as projections about the future
earnings of the company.
Wells fargo has shown consistent growth in earnings over the last five years according to the OCC report
for the year 20102015. There was a 52.9% increase in the retained earnings over last year. Most of these
earnings were due to interest on federal funds sold and resales (63% of total revenue). This was much
higher than the peer group average (0.33% of total revenue).Total assets grew by 25.2% over the last year
(Peer group average 6.64%). Tier one capital grew by 34.85% over the last year (Peer group average
8.06%). Short term investments grew by 34.19% (Peer group average 23.06%). Several reasons can be
attributed to Wells Fargo’s high performance. First, there was the 5.32 % increase in the mortgage loans
over the last year. Mortgage loans now account for 27.95% of the total loan portfolio, which makes the
overall loan portfolio less risky and hence stabilized the annual return rate. Second, there was the 9%
increase in bank’s total deposits over the last year, which helped Wells Fargo issue more loans over the
period. The major reason for the increased deposit was the increased customer satisfaction and increased
customer trust obtained by Wells Fargo by implementing the C.A.R.E. model. The first graph below
shows the trend of annual growth of revenue, net income and earnings per share for Wells Fargo. The
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second graph shows the comparison between Wells Fargo’s earnings with respect to the peer bank’s
earnings.
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From the above two graphs, it is clear that there is an upward trajectory in earnings for Wells Fargo. This
consistent growth has helped Wells Fargo maintain good reputation in the market and develop trust
among its customers.
SCORE(15): 1
Liquidity
Liquidity analysis observes a measure of the extent to which the organization has cash to meet immediate
and shortterm obligations, or assets that can be quickly converted to cash.
Wells Fargo has increased continuously from 20102015 in its total assets and liquidity and financial
health. Wells Fargo’s loans increased $40.3 billion, up 5%, even with the planned runoff in our
nonstrategic/liquidating portfolios. Wells Fargo’s core loan portfolio grew by $60.3 billion, up 8%. Wells
Fargo’s balance sheet grew 11% in 2014 to $1.7 trillion. Wells Fargo liquidity situation increased. By
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improving the quality of their assets, the company held more capital. Also, Wells Fargo raised deposits by
8% in 2014 simultaneously dropping their deposit costs.
Wells Fargo also grew its loans on a yearoveryear basis for the 14th consecutive quarter (for the
past 11 quarters yearoveryear loan growth has been 3% or greater) despite the planned runoff from its
nonstrategic/ liquidating portfolios. Wells Fargo’s nonstrategic/liquidating loan portfolios decreased
$20.1 billion during the year (now less than 8% of total loans) and its core loan portfolios increased $60.3
billion from the prior year. Its federal funds sold, securities purchased under resale agreements and other
shortterm investments (collectively referred to as federal funds sold and other shortterm investments
elsewhere in this report) increased by $44.6 billion, or 21%, during the year on continued strong growth
in interestearning deposits, and the bank grew its investment securities portfolio by $48.6 billion in 2014.
It also issued $24.0 billion of liquidityrelated longterm debt as well as additional liquidityrelated
shortterm funding in 2014. Wells Fargo’s liquidity position continued to remain strong with increased
regulatory expectations.
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As shown in the graph above, it can be observed that Wells Fargo’s loantodeposit ratio was reduced
from 82% to almost 70% over the span of three years. As a result, liquidity at Wells Fargo increased
gradually. Currently, Wells Fargo’s loantodeposit ratio is 65%, which is 5% less than its peer group.
Out of total assets, 1.19% is non interest cash and due from other banks (peer group:1.30%), 14.61% is
availableforsale securities (peer group: 15.22%). All these ratios indicate that Wells Fargo’s liquidity
management performance is almost average, compared to its peers.
SCORE(15): 2
Sensitivity to Market Risk
As a part of the CAMELS rating system, sensitivity to market risk reflects the degree to which changes in
interest rates, foreign exchange rates, and commodity and equity prices affect the earnings or asset value
of the bank.
Wells Fargo has done a significantly better job when it comes to managing its rate or market sensitive
assets. Wells Fargo uses Aggressive Drive Path and Conservative Drive Path based on its forecast on
interest rates. The graph and table below shows the bank’s performance in terms of annual returns of the
rate sensitive assets for each of the Drive Paths.
It can be observed from the graph that the bank provides 7% return on its rate sensitive assets in a
optimistic market for both the drive paths and incurs, on average, a 22.3% loss on its rate sensitive asset
in a highly pessimistic market (worst case scenario).
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Conclusion
Wells Fargo was analyzed using CAMELS Analysis. This report takes into account some of the most
important aspects of the bank in reference to each of the components of the CAMELS analysis. Through
careful observation, our report indicated a strong rating for each of the CAMELS aspects. In terms of
Capital Adequacy, Asset Quality, Earnings, and Sensitivity to Market Risk, we have given Wells Fargo
the highest score of 1. For the two other aspects, Liquidity and Management Quality, Wells Fargo earned
the second highest score of 2. After careful consideration of each of the aspects of the bank and despite
the double ratings of 2, the overall rating given to Wells Fargo is 1. We believe they are a sound bank
under good management and their future as a stable bank is secure.
OVERALL SCORE(15): 1
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REFERENCES
● Wells Fargo & Company. (2014). Annual Report of 2014. Retrieved from
https://www.wellsfargo.com/about/investorrelations/annualreports/
● Wells Fargo & Company. (2013). Annual Report of 2013. Retrieved from
https://www.wellsfargo.com/about/investorrelations/annualreports/
● Wells Fargo & Company. (2014). Wells Fargo Proxy Statements 2015. Retrieved from
https://www.wellsfargo.com/about/investorrelations/annualreports/
● Does Wells Fargo Practice Radical Management?Article on Wells Fargo.
Retrieved from
http://www.forbes.com/sites/stevedenning/2012/01/30/doeswellsfargopract
iceradicalmanagement/
● Financial Analysis on Wells Fargo. Retrieved from http://www.gurufocus.com/stock/WFC.
● Wells Fargo & Co. Is the Earth’s Most Valuable Bank. Article on Wells Fargo. Retrieved from
http://www.wsj.com/articles/wellsfargocoistheearthsmostvaluablebank1437538216.
● Tier 1 Common Ratio Information. Retrieved from
http://www.federalreserve.gov/newsevents/press/bcreg/ccar_20140326.pdf
● Capital Adequacy and Asset Quality Bank Data. Retrieved from www.forbes.com and
www.sageworks.com
● Perez, Saul P. "Banking in 2014: Hits and Misses." Did Banks Adapt to Capital Requirements in
2014? http://marketrealist.com/2015/01/banksadaptcapitalrequirements2014/
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