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Description

Wells Fargo Company Analysis

Company Profile, Mission and Vision

Wells Fargo is an international banking and financial services holding company with more than $1.93 trillion in asset. The company was founded in 1852 and has its current headquarters in San Francisco. Even though Wells Fargo is strongly focused on the United States market, it has international offices in thirty-six nations so as to provide services to its customers who conduct business worldwide (Wells Fargo, 2015). Its mission is to satisfy the fundamental financial human need and connect customers and markets through the transportation of services, goods and funds fast and securely across vast distances. Wells Fargo’s vision is to satisfy all its customers’ financial needs.

Background

Since its establishment in 1852, Wells Fargo has grown immensely to provide investments, banking, consumer finance, mortgage and insurance to numerous individuals all over the world through its thirteen thousand ATMs and eight thousand seven hundred branches (Sperka, 2017). Currently, Wells Fargo is the seventh largest corporation in the world and third biggest bank in the United States based on Forbes’ report, with approximately two hundred and sixty-five thousand active and full-time employees (Wells Fargo, 2017). The company owes its strongest bank in the United States epithet to its business model that is based on three pillars, which entail diversified non-interest income, diversified loan portfolio and prudent risk management that it has developed and employed through the years.Wells Fargo Company Analysis

It is imperative to note that currently, the proportion of customer to commercial loans in Wells Fargo’s portfolio is nearly 50:50. Moreover, this wide footprint allows the company to diversify geographically, as well as, within discordant segments of the economy. The company’s dominance in the banking and financial services sector is also enhanced by the composition of the non-interest income that reflects the company’s concept of diversification as the most ideal protection against risk. The pragmatic risk management exhibited by the bank over the years has been crucial to positioning the bank into community banking with minimum exposure to global events, trading and investment banking as reported in the Market Realist (2016). As such, Wells Fargo’s stock evinces less volatility and has been widely contemplated as a safe harbor among investors when it comes to investing their stock.

Products/Services and Competitors

Products/Services

Wells Fargo offers three main products/services or operates through three major segments, that is, wholesale banking, community banking and wealth and investment management (WIM).

  1. Wholesale Banking-Wells Fargo Company Analysis

Wholesale banking normally provides financial solutions to businesses across the United States and globally. Wells Fargo is capable of offering a comprehensive line of products to business which fortifies its position, as well as, cross-selling revenues. Some of the vital components of wholesale banking include credit services, investments such as 401(k), investment management, capital market and advisory, international business services, treasury management, risk management, institutional brokerage, insurance services and trust servicing. According to the research conducted by Sperka (2017), Wells Fargo’s total revenue amounted to $28.5 billion in 2016 and the net interest income formed fifty-six percent of the total revenue. Wholesale banking contributed thirty-eight percent of Wells Fargo’s consolidates net income.

  1. Community Banking

The community banking umbrella involves an inclusive line of diversified financial services and products for small businesses and consumers including savings and checking accounts, auto, small business and student lending and debit and credit cards. These Wells Fargo’s financial products also include insurance, home equity loans, investment and trust services. In 2016, Wells Fargo’s community banking revenue was more than $48.8 million with a bias to the net interest income that constituted almost sixty percent of the total revenue. On the other hand, the non-interest income constituted forty percent of the revenue with card and mortgage fees making up almost half of the amount. Community banking is Wells Fargo’s strongest product or segment since it contributed fifty-seven percent of the consolidated net income in 2016 (Sperka, 2017).

  1. Wealth and Investment Management-Wells Fargo Company Analysis

This product provides a vast array of personalized wealth investment, management and retirement services and products to clients across the United States. Wells Fargo offers private banking, investment management, financial planning, credit and fiduciary services to ultra-high-net worth and high-net worth people and families. The banking and financial services company also suppliers trust and retirement services to institutional clients, serves client’s brokerage needs and provides investment management capabilities delivered to global institutional clients via separate accounts, as well as, the Wells Fargo Funds (Sperka, 2017). Wealth and investment management contributes the least amount of total revenue and net income to Wells Fargo with only eighteen percent and eleven percent of the total revenue and net income respectively reported by the company in 2016. Nonetheless, wealth and investment management greatly completes the Wells Fargo’s product line and enables the company to satisfy even the most demanding consumers with in-house services.

Competitors-Wells Fargo Company Analysis

Wells Fargo’s main competitors are JPMorgan Chase, Bank of America and Citigroup (Owler, 2018). As one of Wells Fargo’s top rivals, JPMorgan Chase also competes in the investment banking and brokerage industry and is reported to generate one hundred and twenty-three percent of Wells Fargo’s revenue. Since it was founded in 1799, JPMorgan Chases and Wells Fargo have been competitors for a long time.

Bank of America has been one of the top Wells Fargo competitors. It has competed with the latter company since it was founded in 1998. Similar to Wells Fargo, Bank of America also offers services in the Mortgage Finance field. According to Owler (2018), Bank of America generates $2 billion more revenue than Wells Fargo.

Citigroup has a long history as Wells Fargo’s competitor given that it was founded in 1812. Just like Wells Fargo and Bank of America, Citigroup also competes in the Mortgage Finance sector. When the total revenues of Wells Fargo and Citigroup are compared, the latter company generates $14 billion less revenue than the former (Owler, 2018).

SWOT Analysis

Strengths

  • Business Philosophy – The business philosophy of the company is centered around five main values, including consideration of people as the biggest source of competitive advantage, inclusion, diversity and leadership, strong customer focus, and high standards of transparency and ethics.
  • Segment-specific offers – Wells Fargo caters to three vital segments of the economy, that is, personal, commercial and small businesses. Under the commercial segment, the company offers insurance, merchant services, credit facilities and online banking services. Small businesses get loans, credit lines, banking services, insurance, payroll services and merchant services from Wells Fargo. People in the personal segment get insurance, loans and credit, wealth management, trust services, and investing and retirement from the company.
  • Customers across income groups – Wells Fargo enjoys a wide customer base from all income groups.
  • Acquisitions – Wells Fargo has made a series of acquisitions over the years that have fortified its financial position and influence in the industry, for instance, the acquisition of Wachovia which increased the company’s customer base and revenue.
  • Community Banking Services – The company offers community-based banking services such as bank accounts, credit cards, loans, account management and debit cards.
  • Retail and wholesale banking – Wells Fargo provides wholesale banking services such as crop insurance, commercial real estate, equipment financing and energy syndicated loans. On the other hand, Wells Fargo also offers retail banking services such as credit, loans and debit cards (Bhasin, 2018).

Weaknesses

  • Bank Scandal – Well Fargo’s public image is still tainted by the scandal of fraudulent accounts and transactions. Numerous long-standing customers moved to other banks due to loss of trust in the bank.
  • Customer Relationships – There have been various allegations that the company treats higher income clients differently from how it treats lower income clients even though Wells Fargo claims to be customer-centric.
  • Higher costs – Wells Fargo has incurred significant costs due to its expansion efforts in the last decade. Other operations costs in various segments and financial domains, as well as, legal charges related to the scandal have affected the company’s operations adversely (Bhasin, 2018).

Opportunities

  • Expansion into smaller towns – Most of Well Fargo’s banking and investment operations are in the United States and primarily in cities. The company ought to pursue markets outside the United States such as India or China which are currently experiencing steep economic growth, as well as, significant financial reforms (Bhasin, 2018).

Threats-Wells Fargo Company Analysis

  • Financial Unrest – The global economy is facing crucial financial crunch and there have been significant fluctuations in the financial services market. This is poised to have unfavorable effects on the operations of Wells Fargo in the long-term.
  • Competition – Wells Fargo still faces stiff competition from JFMorgan, Citigroup and Bank of America (Bhasin, 2018).

Ethical Consideration

Wells Fargo has the fiduciary duty or ethical mandate to treat its customers fairly. This is why the company let go of four of its executives in connection with a regulatory investigation into the foreign exchange operations of the bank. This move was in response to the fraudulent behavior exhibited by its employees. Wells Fargo is known for beating the odds during the financial crisis through its acquisition of Wachovia and becoming the third largest bank in the United States in terms of assets. However, behind this success was a culture that caused employees to open fraudulent accounts in an effort to attain lofty sales goals. Well Fargo’s management set unrealistically high sales goals for its works that proved to be overwhelming for them to attain in the right manner (Heskett, 2017). As a result, the employees decided to game the system through the creation of fraudulent accounts. If a customer purchased a particular service, the employees were exhorted to cross-sell several more. As such, the only way that the employees at Wells Fargo could attain their unrealistic sales targets and retain their jobs was to create accounts that the customers had not requested and often unaware were incurring charges. In order to keep their bosses happy and keep their jobs, employees fabricated millions of fraudulent accounts they knew were detrimental to the customers in conflict of interest (Heskett, 2017). Wells Fargo Company Analysis

Wells Fargo attempted to curb the fraudulent activities through an ethics workshop in mid-2014 that issued warnings to employees not to formulate fake accounts in the consumers’ names. In addition, the company altered its compensation system to place less emphasis on sales goods. However, these efforts proved not to be sufficient in the following years since Wells Fargo continued to fire more employees over fraudulent accounts. It is because of this reason that the company decided to shift its focus from the employees, whose motive for committing these crimes was hinged on the company’s compensation system, to the executives who were responsible for such kind of structures (Heskett, 2017).

Marketing Strategy

Odell (2015) reports that over the years, Wells Fargo has changed its marketing strategy to a Total Market Approach (TMA) similar to fifty-four percent of marketers in the industry who have utilized TMA and reaped the benefits of business improvements. According to WARC (2016), guiding Wells Fargo in its Total Market Approach to marketing is the underlying precept that its prospective customer base comprises of various groups and cultures which are incessantly influencing one another. As such, the Total Market Approach marketing strategy features carefully written cross-cultural messages that are based on a ubiquitous truth of taking care of family, owning a home, pursuing higher education and retiring comfortably which are pertinent to the main segments of brand growth (Odell, 2015).

Wells Fargo marketing now caters for and portrays the increasing diversity and impact of multiculturalism on the American culture. This is evident in how it deploys cross-cultural and integrated approaches that are not only representative but also inclusive of all segments through the incorporation of cultural cues that have a universal appeal. As Odell (2015) denotes, Wells Fargo’s campaigns are built around three guiding tenets, that is, treat the customer with kindness and veneration, know the customer and have transparency and integrity. One of the principal objectives of Wells Fargo is to get Millennials to open checking accounts. The Total Market Approach marketing strategy brings together Wells Fargo’s diverse agencies from all segments to work together with the aim of honing a cross-cultural message with universal appeal that resonates with Millenials and other demographics.

There is no doubt that high-level metrics such as consideration are prominent. However, Wells Fargo aims to ensure that the messaging around the key attributes for its products are also making an impression. While the “general market” approach to marketing conventionally assumed that the bulk audience for marketing messages was mainly similar, the Total Market Approach to marketing actively acknowledged the cultural and demographic changes that are reshaping the United States (WARC, 2016).

Industry and Economy Impact

The financial sector where the S&P 500 operate includes credit card companies, insurance companies, stock brokerage firms, banks, mortgage companies, investment firms and other publicly traded financial companies (Kress, 2013). Wells Fargo is found in the “Diversified banks” sub-sector that constitutes 11.73% of the entire financial sector (Kress, 2013). Revenues evince a true picture of how damaged the diversified banks sub industry is since the advent of the financial crisis and novel regulations that have been implemented. This is because revenue has continued to remain depressed post the financial crisis due to various reasons. The main reason is loan growth which is otherwise the main source of revenue for diversified banks. However, there has been some recovery in the economy due to the stimulus that was conducted by the Federal Reserve as a monetary policy, for instance, lower interest rates quantitative easing 1 and 2 and government support as a fiscal policy such as first time home buyer incentive among others even though these initiatives were short lived for this industry.

The recent monetary policy implemented stands to foster revenue, but overall would result in damaging of margins to a great extent. Based on this understanding, unless the economy was to fluctuate significantly overnight, the slight increase in revenue would not be sufficient to cover the additional loss of margin that is poised to further hurt the diversified banks industry. While the financial sector industry is unlikely to experience increases volumes in loan growth and non-interest income, which are the major sources of revenue for diversified banks such as Wells Fargo, until economic conditions improve as normally seen in the housing market which proceeds economic recovery, Wells Fargo will continue to experience loss of margin (Kress, 2013).Wells Fargo Company Analysis

Economies of scale is vital in banking since banks with extensive asset base are able to charge lower interest rates and smaller fees normally because they are focused more on transactional banking instead of relationship banking. This benefit is not enjoyed extensively by smaller sized banks due to their higher overall volume of services and loans. The implication of these economic effects is that the diversified banks sub industry will have to continue to consolidate so as to expand during this period of poor economic conditions. Fortunately, Wells Fargo has already taken necessary steps to elevate itself to a point where it can stand alone in the diversified banks sub industry and the financial sector industry such as the acquisition of Wachovia (Kress, 2013). Since in the aftermath of the financial crisis the financial sector was permeated with new regulations that required banks and financial companies to raise their capital levels before mergers or acquisitions, most mergers and acquisitions that occurred after the financial crisis altered the diversified banks sub-industry significantly. Companies that acquired other companies rendered them huge enough to influence economic decisions and interest rates, for instance, Wells Fargo acquired Wachovia and nearly doubled its size, JPMorgan acquired Bank One and Bank of America acquired Merrill Lynch (Kress, 2013).

 

Financial Statement-Wells Fargo Company Analysis

WELLS FARGO SECURITIES, LLC
(An Indirect Wholly-Owned Subsidiary of Wells Fargo & Company)
Statement of Financial Condition
June 30, 2018
(Dollars in thousands)
(Unaudited)
Assets
Cash $ 96,430
Cash segregated pursuant to federal regulations 439,635
Securities borrowed 36,634,051
Securities purchased under agreements to resell 15,421,976
Receivable from broker-dealers and clearing organizations 19,308,125
Receivable from customers, net 4,330,838
Financial instruments owned, at fair value ($41,774,988 pledged as collateral) 55,615,264
Property, equipment, and leasehold improvements, net 467
Goodwill 79,687
Other assets 595,698
Total assets $ 132,522,171
Liabilities and Member’s Equity-Wells Fargo Company Analysis
Liabilities:
Securities sold under agreements to repurchase $ 74,643,302
Securities loaned 8,538,555
Payable to customers 12,379,558
Payable to broker-dealers and clearing organizations 525,917
Payable to non-customers 529,738
Financial instruments sold, not yet purchased, at fair value 17,915,170
Borrowings 5,029,044
Other liabilities 624,887
Total liabilities 120,186,171
Subordinated borrowings 7,300,000
Member’s equity:
Member’s contributions 1,565,243
Accumulated earnings 3,470,757
Total member’s equity 5,036,000
Total liabilities and member’s equity $ 132,522,171

 

Source: (Wells Fargo, 2018).

 

 

Conclusion-Wells Fargo Company Analysis

Wells Fargo is believed to be a high-quality banking and financial services company, which is rarely attractively valued when contemplating long-position. This can be attributed to its rich history of growth and strategic decisions that have made the company excel even in times when the economy is bad. Nonetheless, analysis of presumed competitive advantages and ethical considerations revealed a slightly worsening position for the company. This assertion is based on fraudulent transactions and fake accounts encouraged by Wells Fargo that saw the company grow even bigger during the financial crisis at the expense of its customers and the significantly higher revenues registered by its main competitors. In addition, analysis of presumed impact of the economy on the financial sector revealed that diversified banks such as Wells Fargo are poised to experience a decrease in margin despite there being an increase in revenue. All in all, Wells Fargo’s financial position is strong and sufficient to withstand an uncertain global economy and sustain growth.

 

 

 

 

 

 

 

References

Bhasin, H. (2018). SWOT analysis of Wells Fargo – Wells Fargo SWOT analysis. Retrieved from https://www.marketing91.com/swot-analysis-of-wells-fargo/

Heskett, J. (2017). What Are the Real Lessons of the Wells Fargo Case?. Retrieved from https://hbswk.hbs.edu/item/what-are-the-real-lessons-of-the-wells-fargo-case?cid=wk-rss

Kress, W. (2013). Wells Fargo (WFC). Retrieved from http://www.unm.edu/~maj/Security%20Analysis/Fall%202011%20Analyst%20Reports/WFC.pdf

Odell, P. (2018). Wells Fargo’s Total Market Approach Journey. Retrieved from https://www.chiefmarketer.com/wells-fargos-total-marketing-journey/

Owler. (2018). Wells Fargo Competitors, Revenue and Employees – Owler Company Profile. Retrieved from https://www.owler.com/company/wellsfargo#financials

Å perka, M. (2017). FUNDAMENTAL ANALYSIS OF WELLS FARGO & COMPANY.

WARC. (2016). Wells Fargo taps total market strategy | WARC. Retrieved from https://www.warc.com/newsandopinion/news/wells_fargo_taps_total_market_strategy/35992

Wells Fargo. (2018). Financial Reports – Statements of financial condition. Retrieved from https://www.wellsfargo.com/com/securities/financial-reports/