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Wells Fargo: Another Crack In The Facade

Summary

Wells Fargo continues to sport a premium valuation despite the fact that its performance is becoming more and more average.

The other three TBTFs have very low LTD ratios, offering a potential upside catalyst.

But WFC is already much higher than the others, removing a potential source of growth and further putting the valuation at risk.

Wells Fargo (NYSE:WFC) has long been regarded as the gold standard among the large banks. This reputation has been earned through prudent management and a history of strong earnings but of late, I've called out various ways that the other large banks are closing the performance gap. Wells, for its part, hasn't been performing like the old Wells and that is a big part of the reason why I think the other banks are catching up; not only is Wells becoming more average but the other TBTFs are improving as well. And in terms of an upside catalyst, I've highlighted JPMorgan (NYSE:JPM), Citigroup (NYSE:C) and Bank of America (NYSE:BAC) as having lots of room to run with respect to their loan-to-deposit ratios. All three have a lot of risk they can put back on the table without unduly stressing their financials but where does Wells Fargo stand? Is it in the same boat or is this yet another case where Wells is in a less favorable position than its more cheaply valued competitors?

For this article, I used data I extracted from the 2Q 2016 10-Q as well as WFC's annual report archives to create the chart below for our discussion.

We'll begin by taking a look at the chart because it contains lots of interesting information that is relevant to this exercise.

The blue bars are WFC's loans, the red bars represent deposits and the green line is the resulting LTD ratio. There are a few things to point out here but we'll start with the sheer size of WFC's balance sheet. Prior to the crisis, WFC had less than $400B each in loans and deposits, making it a large bank but nothing like the behemoth it is today. The biggest reason for the jump in the size of WFC's balance sheet was, of course, the Wachovia acquisition. Wachovia was...


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