Wells Fargo Financial Analysis, Research Paper Example

Introduction: Company Overview

This is an in-depth business, strategic and financial analysis of wells Fargo and company. This report provides a comprehensive overview of the company, including competitors, business structure and growth, its financial operations and its executive biographies.

Wells Fargo is a diversified financial service company located at San Francisco in North America. This company began a new era of banking in 2008 when it owned a commercial banking giant Wachovia, becoming USA fourth largest bank in terms of assets. Its assets are up to $1.3 trillion. The company has over 80 distinct businesses in 50 states. The company line of business include banking, insurance, investments, mortgage banking, investment banking, retail banking, brokerage and consumer finance through banking stores. Additionally The Company offers the following products and services, mortgage- backed securities; small business lending, middle market commercial banking, commercial real estate brokerage, agricultural lending, and bank owned insurance brokerage (Thomas, Munter, & Julia, 2004).

Wells Fargo has over 80 lines of business and it operates in 50 states, in the district of Colombia and other countries in the globe. In the year 2010, the company earned a total of $85 billion from revenues and a net income of $12.4 billion. These huge gains were as a result of the company acquisition of Wachovia Thus becoming the nation’s largest mortgage lender enabling it to generate such enormous profits. The company acquisition of Wachovia involved court cases where Citigroup sued wells Fargo on acquisition of Wachovia but wells Fargo won the dispute by paying the Citigroup $100 billion. The company was forced to sell $12.6 billion common stock and $25 billion preferred stock to the US government through troubled asset relief program so as to raise part of the money for the acquisition of the new commercial banking giant Wachovia.

Wells Fargo Company has been affected negatively like many other companies by the credit crunch and the consequent economic decline. However, contrary to other many banks it has not been forced to record large losses on its assets. Conversely after the company acquired Wachovia it was down graded by the standard and poor’s rating services from AAA to AA+ RATING.

Company Financial Statement

The rise of $12.25 billion by wells Fargo through stoke sell to help in repaying the $25 billion in troubled assets relief program money it received from the government during the financial crisis made its shares to be diluted to around 10% but this helped it to avoid paying an annual dividend to the government of $1.2 billion and most importantly it freed it from government oversight enabling it to become more flexible (Thomas, Munter, & Julia, 2004).

In 2010 wells Fargo Company increased its net income from $12.3 billion in 2009 to $12.4. However, despite the increase the company’s earned total revenue was $85bilion which was a decline from the year 2009 where the company earned total revenue of $89 billion. In 2011 wells fargo recorded net revenue of $19.63 billion and net income of $4.06 billion and record earnings per share of $0.72 from earlir quarter the revenue were less by -3.72% net income up by +2.71% and average pershare up by +2.86%. from the previous year 2010 net revenue were down by -5.71% net income up by+21.44% and earnings pershare up by +20%. This was due to ongoing decrease in provision of credit loses.

Balance Sheet

Total company assets increased to $1.305 trilion to date from 2009. Capital to assets ratio showed a growth of 10.67% and return on capital improved to 1.21%. Gross loans increased by 2.64%.

The American president announced that large banks and financial institutions will be taxed by the government so as to recover the TARP funds used by the government to bail out the banks (Charles, 1998).  It is proposed that 0.15% tax will be imposed on the firm’s liabilities which are aimed at rising about$ 90 billion over ten years. This proposal is limited to big financial institution s like wells Fargo who own up to $50 billion assets. This will be a very big blow to wells Fargo if it goes through especially these times of economic recession.

Wells Fargo has 6,795 branches and $760 billion total domestic deposits. Its most offices are in USA and it focuses mainly it s business operations on the USA domestic market. The company receives stiff competition from nationwide, bank of America, JP Morgan chase and Citigroup. Those competitors have international exposure unlike Wells            Fargo which is only focused in gaining greater market locally in America. Therefore, Lack of international exposure makes Wells Fargo vulnerable to the economic cycles due to its lack of foreign markets to supplement domestic performance (Charles & Frishkoff, 1985).  Also the companies business concentration in USA makes it vulnerable to losses since the rising geopolitical conflicts such as treats of terrorism could affect economic conditions in USA hence the downturns and upswings of the US economy affects the company’s earnings.

Financial Performance

The figure of $4.1 billion was reported for wells Fargo as the year 2011 quarterly net income and its record earnings per share was at $0.72. This indicated a strong financial performance. However, net revenues were reported to have decreased. The company continues to operate on its conservative strategy which has seen a decline in credit losses, sustained strong levels of capital and resulted to 1.21% return on capital which is impressive. The balance sheet and earnings continue to improve as reported by the latest quarter.

The following represents the financial performance of wells Fargo immediately after the merger with Wachovia. The wells Fargo earnings per share increased for 7 consecutive quarters to trade at the current rate of $0.72 which is a record high.

The above chart shows that average earning per share is $0.55.

The company’s current Net Revenue continues below the historical average of $19.63. However, the Operating Income is at an all time high of $6.14 billion. This is mainly due to a decrease in operating expenses and decrease in provision for credit losses; this has in turn driven the current Net Income at an all time high of $4.06 billion

Wells Fargo Net Margin and operating Margin; Operating margin is at 31.2% and the net margin is at 20.66%. Wells Fargo capital to assets ratio represents the shareholders equity to total ratio of the assets (Charles & Frishkoff, 1985).

The capital ratio has declined to a level of 10.67% after increasing steadily in prior quarters. The ratio of capital to assets is 10.67% which is quite strong.

An analysis of the company’s return on assets ratio shows it to be at a multiple high of 1.21%. Considering the company’s conservative strategy, this can be taken to be a good performance.

The income statement components to be analyzed include; Net interest income, Non interest expense, provision for credit loses and non interest revenue. The $11.68 billion current operating expenses and non interest expense is at a multi year law and so is the $10.54 billion Net Interest Income. The $1.81 billion provision for credit losses show it has been on decline for 8 years in a row.

An analysis of wells Fargo asset mix comprises of Mortgages and loans for sale, cash and securities, mortgage servicing rights, non earning assets e.g. equipment and premises, goodwill etc, net loans. The current quarter show that the company’s assets are relatively stable.

This shows that the company financial is stable due to its conservative strategy that has enabled it to sail through the sluggish financial recovery. The integration of Wachovia has been part of the reason behind sustained financial performance. The above analysis indicates the company has a stable deposit, capital, loans and investment securities along with reduced expenses and quality credit amid turbulent financial times.

Stock Price Analysis

It is important to scrutinize a company’s financial statements, consider the growth potential in the long-term, and determine its competitive position when determining its value. Key data to be considered include earnings estimates, revenues, earnings, balance sheet, dividends, corporate information, cash flow and income statement.

Relative value of different stocks can be compared through dividing the current price-per-share divided by the annual earnings-per-share. When a company’s P/E ratio is 4, the stock price for that company is 4 times its annual per-share earnings (Charles, 1998).

Most of the well Fargo’s P/E is relatively expensive in comparison to competitors and the trend is likely to continue in the face of stabilizing global economy. P/E helps establish whether a stock is expensive or cheap.

There are other ratios which can be used to determine the value of stock. These include; price to sales, price to earnings growth, dividend yield, price to book value and price to cash flow. Other non-priced based ratios that should be considered include; liquidity ratios, turnover ratios and leverage ratios.

A closer look at these ratios for well Fargo shows that it is relatively stable. The company is in a position to attract all types of investors. However, it should focus more on retaining the savers who are their greatest source of deposits.

References

Charles, H. G., (1998). Financial statement analysis: using financial accounting information. University of Michigan: South-Western College Pub.

Charles H. G.  & Frishkoff, P. A., (1985). Cases in financial reporting. Kent Pub. Co.

Martin, S. F. &  Álvarez,  F., (2002). Financial statement analysis:  a practitioner’s guide   3^rd Ed.  John Wiley & Sons.

Thomas R, Munter, P. & Julia, G., (2004). Financial statement analysis: a global perspective. University of Carlifonia: Pearson/Prentice Hall.