Wells Fargo: The Bank That Works
The solution to the housing crisis could be found in October at the Pennsylvania Convention Center, a three-block-long facility near Philadelphia’s baroque City Hall and otherwise known for hosting that city’s famous flower show and the annual celebration of costumed merrymakers known as Mummers. For two days, financial services giant Wells Fargo, America’s largest residential-mortgage originator, took over 104,000 square feet for one of the 51 “Home Preservation Workshops” it has held over the past three years.
The euphemistically named event is, in reality, a convention of indebted homeowners, mostly those with underwater mortgages and foreclosed homes. Rather than wear name badges, the 719 attendees toted around pay stubs, W-2s and mortgage statements and, after decompressing with popcorn and lemonade, met face-to-face with one of 100 or so Wells Fargo “home retention team members,” who, with their own individual booths splayed across the exhibit hall, were ready to provide “on the spot” restructurings, including term extensions and principal reductions.
The meetings are strictly confidential, and attendees are understandably sheepish about sharing their plights. But an idea of the private goings-on can be found from a working mother facing foreclosure, “brokeinnj,” who relayed her Philadelphia experience on Loansafe.org, an online clearinghouse for underwater homeowners. Her outcome: a new 40-year mortgage that rolled in the $12,000 that was past due. The drawn-out terms dropped her monthly bill $300, without dropping the 5.625% annual rate the bank charges. “It is a great feeling to not worry about seeing a car sitting in front of your house wondering if they are from the bank looking at your home,” she reported. “When our youngest says how much he loves this home and safe he feels, we don’t have to get a sick stomach from wondering if we will be forced to move.”
Washington has promoted low interest rates as a housing cure-all, while Wall Street cowers in a lawsuit-weary fetal position. For Wells, which has forgiven $4 billion in mortgages since then, rather than hiring PR firms to spin its way out of the mess, the overriding business mission is keeping customers in their homes and regaining the trust of their customers, one by one, face-to-face.
It’s a monumentally larger version of the critical scenes in It’s a Wonderful Life, and Wells Fargo even has its own version of George Bailey/Jimmy Stewart: CEO John Stumpf, who spins out the kind of corny, homespun sayings you might find embroidered and framed on the wall of Aunt Tilly’s lake cabin. “When we hire somebody around here, we want to know how much you care, before we care how much you know,” he says, without the slightest hint of irony as we sit with him at his San Francisco office. “We call our employees team members, not employees. Employees denote an expense to be managed. Team members are an asset to be invested in.”
It’s hard not to be a bit jaded by—and skeptical of—the saccharine homilies. All of Wells Fargo’s 264,200 “team members” receive a 37-page book, Vision & Values signed by Stumpf, full of warmed-over prescriptions for how to behave, treat customers and, above all, increase revenue. But in a field where sayings like “every man for himself” and “eat what you kill” have led to blunders of historic scale, it’s also a welcome departure. As are Wells’ numbers: In the fourth quarter of 2011 Wells Fargo had a return on equity of 12% and an average return on its $1.3 trillion in assets of 1.25%, wildly better than JPMorgan Chase (8% and 0.65%), Bank of America (3% and 0.36%) and Citigroup (2.6% and 0.61%). “It’s nothing like those banks at all,” says Stifel Nicolaus analyst Christopher Mutascio. “It’s more risk-averse, and it doesn’t have the same international or investment banking presence.”
Another difference: It’s worth more. Wells Fargo has the largest market capitalization of any American bank ($161 billion), including JPMorgan Chase, which has twice the assets. The market values Wells above Bank of America, Goldman Sachs and Morgan Stanley—combined.
Let those banks trade wantonly and race to beat each other to marginally profitable investment banking business. Wells does what banks are supposed to do: take deposits and then lend the money back out. Interest margin drives half its revenues. Fees from mortgages, investment accounts and credit cards generate the other half. “I couldn’t care less about league tables,” says Stumpf, throwing out a line custom-made for the Wells aphorism book. “I’m more interested in kitchen tables and conference room tables.”
By operating a bank like a bank, Stumpf has at once made Wells exceedingly profitable—for 2011 the bank’s net income jumped 28% to $15.9 billion, on $81 billion in revenue—and extremely safe. Wells originates one in four U.S. mortgages and services one in six, yet its efficiency ratio—the cost required to generate a dollar of revenue—is unrivaled at 56% and compares with 66% for both JPMorgan and Citi, and 86% for Bank of America. And while its competitors follow European news with panicky obsession, there’s no chance of a PIIG contagion here: Foreign loans are a mere 5% of its portfolio. Says Stumpf, referring to the bank’s U.S. focus: “Boy, that’s a basket I love right now.”
Wells Fargo’s largest shareholder is Warren Buffett, who has owned the bank’s shares for two decades. (Berkshire Hathaway currently controls 6.8%.) Little wonder: From Procter & Gamble to IBM, Buffett has always invested based on corporate ethos—he recently tapped his son Howie, a farmer, to succeed him as chairman and “guardian of Berkshire’s culture”—and Wells Fargo, as evidenced by that book of sayings, is an ethos place.
You can’t walk ten feet at its San Francisco headquarters without smacking into the culture, literally. Stagecoach images and models fill every empty space, links to a frontier history that Wells is happy to exploit for propaganda purposes (it was started by the two founders of American Express in 1852 to provide banking services for the California gold rush, and quickly took over the western half of the Pony Express). No matter that most of the bank’s assets stem from Norwest Bank, which merged with Wells in 1998. Family-friendly Wells museums sit in 11 of its biggest markets.
Wells’ down-to-earth approach isn’t just for public show. “You don’t see John Stumpf at the World Economic Forum in Davos—and that’s good,” says Mike Mayo, an analyst at CLSA. In contrast to John Thain’s $35,000-toilet-adorned office, Wells’ executive suite seems trapped in the 1970s, down to the orange-brown carpeting and tired-looking upholstered chairs in Stumpf’s office. During FORBES’ interview pipes clanged as the heat came up. The CEO’s credenza is cluttered with banking tchotchkes and family pictures, including one of his father and mother surrounded by 30-plus grandchildren. But despite his trophy-driven industry, his office is noticeably devoid of plaques or Lucite deal toys. It’s also devoid of something else you’d expect: a door.
“Around here if you have something to say, you say it—nobody is going to be offended,” says Stumpf of his policy of no doors on the executive floor. “We’ve learned how to disagree without being disagreeable. There’s no tolerance for being passive-aggressive or for having sharp elbows around here.”
The 59-year-old Stumpf fits the template of a Buffett CEO, down to the agricultural background. Stumpf’s father was a dairy farmer in the German Catholic enclave of Pierz, Minn., and his 10 children (Stumpf shared a bedroom with his brothers until he got married) were expected to pitch in. From age 10, when his dad added a chicken barn for 10,000 laying hens, Stumpf would rise at 4:30 a.m. to pick eggs; after school, he milked cows. “Even though we were very poor financially we learned the value of plural pronouns—us, we and ours,” says Stumpf, who has kept his flat prairie accent. “There wasn’t a lot of time for I, me and my.”
During the harsh winters, the family drank beer (each member had his or her own stein, says a college friend). They also played bridge. (Stumpf still plays, mostly online, sometimes partnering with Buffett’s sister Bertie against her brother or Bill Gates.) But card smarts did not translate at high school; Stumpf graduated in the bottom half of his class, and those bad grades and limited family finances netted him job as a breadmaker in a Pierz bakery.
“After about a year I decided there was more to life than learning to bake pumpernickel,” he says. So Stumpf enrolled in St. Cloud State University on a provisional basis and eventually got a job at First Bank in St. Paul, albeit on the lowest rung of the banking-career ladder: repo man. “I learned how to lend money by cleaning up the messes of others who had made loans before me,” says Stumpf. “You’d have these cars memorized. You would know there was a ’69 Buick of a certain color and the person was 90 days past due and wasn’t answering your telephone calls. You would track him down, call the tow truck and just as the car started to lift off the ground, out of the bar would walk a giant of a guy with two six-packs of confidence in him, and he wants to know what you are doing with his car. Now, that is exciting! You learned the power of persuasion.”
Mastering that art, six years later Stumpf joined Northwestern National Bank, which eventually became Norwest and which in 1998 swallowed Well Fargo, assuming its name and history. Stumpf rose in lockstep—he ran various regions and then in 2000 led the integration of $23 billion First Security of Salt Lake City. In 2002 Wells Fargo chief executive Dick Kovacevich called Stumpf to San Francisco and put him in charge of community banking.
A Walter Wriston-trained former Citibanker, Kovacevich is credited with developing the bank’s obsession with cross-selling products to its customers He viewed banking as a commodity business and preferred to compare Wells Fargo to merchants like Wal-Mart or Lowe’s rather than Citigroup or Goldman Sachs.
His vision was that service and salesmanship would win the day and that the key to success would be to tear down the silos so cross-selling would flourish. With checking accounts, mortgages, and small business loans as an anchor, Kovacevich used cross-selling to create sticky, loyal customers and boost returns. Wells Fargo sells its retail-banking customers an industry-leading 5.9 products, and its 4.4 million brokerage customers average 10 each.
As Stumpf’s bible puts it: “There are only three ways a company can grow. First, earn more business from your current customers. Second, attract customers from your competitors. Or third, buy another company. If you can’t do the first, what makes you think you can earn more business from your competitors’ customers or from customers you buy through acquisition?”
In June 2007 Stumpf inherited the CEO job from Kovacevich, who remained chairman, at almost the precise apex of the housing bubble—within months, he would be inside the largest banking monsoon since the Great Depression. His big move: outmaneuvering Citigroup’s Vikram Pandit to acquire North Carolina’s troubled Wachovia bank at the height of the meltdown, in early October 2008. It’s a textbook case of Wells Fargo’s culture in action.
“We got a call about Wachovia, and we pulled all-nighters that whole weekend, but by Sunday night, we had to ask for more time,” says Stumpf. We simply could not complete our analysis, even though we loved Wachovia and its people and its businesses. One of our corporate disciplines is you don’t buy things you don’t understand.”
The next day, it was reported that Citigroup would buy a piece of Wachovia for $2.2 billion, plus a government backstop. Chairman Kovacevich, who was in New York, even called Wachovia chief Bob Steel to congratulate him.
But Stumpf and his San Francisco team kept tearing apart the financials: “We didn’t put our pencils down.” By Thursday they had a grasp on the business and were convinced that it could meet their internal criteria: adding to earnings per share no later than the third year after purchase and creating an internal rate of return of at least 15%. That evening Wells came over the top with a successful
$15 billion offer for the whole company, without help from Uncle Sam—and ultimately without the severe pain that BofA felt after it swallowed Countrywide.
The methodical Wachovia integration, which doubled Wells Fargo’s size, was fully completed this past November. Using Wells Fargo “buddy bankers” to infuse culture and best practices, every one of Wachovia’s 4,000-plus branches is now a Wells Fargo store. Following another precept from Stumpf’s vest pocket book, “retain and retrain,” only 1.5% of its workforce was eliminated.
The ability to eventually say yes to Wachovia had been enabled by saying no a lot during the bubble years. From 2003 to 2006 Wells Fargo pulled away from the riskiest subprime mortgages, and as a result its market share actually fell from 11.9% to 10.2%. “We didn’t originate an option arm loan in our entire career here,” says Mike Heid, president of Wells Fargo Home Mortgage. “Inside the organization there was a lot of encouragement to take the long-term view even though the outside world was saying that we just didn’t get it.”
Similarly, back in 2006 Wells’ chief risk officer, Michael Loughlin, clashed with the head of Wells Fargo’s $26 billion auto-lending portfolio, who he felt tolerated junky underwriting standards. Eventually, Loughlin took his case to the full board of directors; the entire operation, based in Des Moines, was shut down. “There’s only three jobs at Wells Fargo: taking care of existing customers, getting new customers and managing the risk of those two things,” adds Loughlin. “Nowhere in there am I talking about profitability or market share.”
What’s left unsaid, of course, is that ignoring market share short term is the best way to juice it long term. Wells today has a 26% share of mortgages, and its mortgage foreclosure and delinquency rate is 7.6%, compared with 8.3% at Citi, 11.5% at JPM and 13.5% at BofA.
That doesn’t mean that Wells doesn’t have some of the same problems that the rest of the sector has. Wells still has $112 billion in bad mortgages and other delinquent loans (including $2.5 billion from the auto-lending unit) that it needs to liquidate. And Wells is among the five lenders being investigated by the nation’s 50 attorneys general over shoddy foreclosure practices, specifically robo-signing (a $20 billion settlement is rumored), while Fannie Mae and Freddie Mac are demanding that Wells and others repurchase mortgage-backed securities they say weren’t as healthy as promised. There’s also a possibility that private investors, including Pimco and BlackRock, will go after Wells Fargo over the quality of $19 billion in mortgage-backed securities.
But the market seems to think Wells will fare well, at least in comparison with its peers. Amid an awful 12 months for financial stocks, Wells Fargo’s shares are only off 6% compared to an 18% decline for JPMorgan Chase, 39% for Citigroup, 35% for Goldman Sachs and 50% for Bank of America. Just as with market share, it seems, the less you care about stock price, the higher your stock will go. (“This may surprise you,” Stumpf writes in the company’s bible. “We believe shareholders come last.”) The company’s systematic share repurchasing (30 million shares in the last year) and a Buffett-predicted dividend boost (which, post-meltdown, requires federal approval) should provide yet more upward pressure
“I have never seen more opportunity than we have,” says Stumpf. “We have grown deposits and relationships and cross-sell. We have fewer competitors now, and some of the ones we have are inwardly focused now. … And we punch above our fighting weight.”
That means taking advantage of the massive deleveraging and asset shedding going on here and abroad, with Stumpf’s caveat that “we won’t do anything large and complex, unless it really fits.” Wells Fargo recently purchased $5.5 billion of loans from Allied Irish Bank and the Bank of Ireland—but true to its domestic bias, that portfolio is for debt owed by U.S. companies, not foreigners. More assets can be garnered by using all of its Wachovia advisors to cross-sell retirement plans. “We have $1.4 trillion in client assets and 4.4 million customers in my world,” says David Carroll, a former Wachovia executive now heading Wells brokerage and retirement division. “But there’s another 5.5 million customers that consider Wells Fargo their primary bank or financial institution that have $1.7 trillion away from us in investments.” Another growth area: private-label credit cards with big retailers who’ve lost their stomach for being a bank. (Target, where Stumpf sits on the board, is a natural fit.)
Ultimately, the largest opportunity—and threat—remains the U.S. housing market. The bank’s strategy, including restructuring confabs like the one in Philadelphia, has played out winningly, but being the dominant mortgage lender in America will prove a Pyrrhic victory if people don’t buy mortgages.
Last year foreclosures, short sales and other distressed transactions still represented 30% of the 3 million to 4 million homes sold; as long as a troubled trillion-dollar inventory looms, housing prices can’t recover. “The reason people aren’t buying homes is because they think it will be cheaper next year,” says Stumpf. “And they’ve been right for the last three years.”
Based on Wells’ work-out experience, Stumpf has shared a plan with Congress that he claims could fix the problem: Take the foreclosed properties off the sales market and instead put them into a massive rental pool. “You would take a lot of the sting out of losing a home, and the banks would do better over time,” say Stumpf. “I think you would see an immediate 5% to 10% pop in home values right out of the chute.”
The biggest stumbling block: Banks don’t actually own most of these mortgages. Half are owned by Fannie Mae and Freddie Mac, and the rest are primarily owned by private investors in the form of collateralized-debt obligations. These groups would have to buy into the plan.
Of course as the number one mortgage lender and servicer, Wells would stand to directly benefit from his foreclosure, rental, housing-market recovery plan. And rental servicing might also create another good excuse for a Wells team member to close on a cross-sell. Doing well while doing good— George Bailey would be proud.
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