Wells Fargo & Co (WFC): Following Buffett Into This High Quality Bank

Warren Buffett knows a couple of things about investing, especially when it comes to the financial sector. The Oracle of Omaha has been regularly accumulating Wells Fargo & Co (NYSE:WFC) for a long time, and it has even become the biggest stock position in Berkshire Hathaway Inc. (NYSE:BRK.A)‘s portfolio. Even if the stock has been rising steeply over the last months, it´s not too late to follow Buffett into this high quality bank.

Simplicity and quality

Buffett believes in the power of simplicity, and Wells Fargo & Co (NYSE:WFC) is unquestioningly the high quality play among big U.S. banks due to its straightforward business model and superior risk management policies. While competitors like Bank of America Corp (NYSE:BAC) and Citigroup Inc (NYSE:C) were exposing themselves to toxic assets and complex derivatives during the credit bubble, Wells Fargo was simply focused on what it does best; loaning money to deserving clients.

Book value is traditionally used to evaluate financial companies, since their assets and liabilities are mostly liquid; then book value – assets minus liabilities – per share is believed to be a fair representation of the economic value of shareholder´s equity. Warren Buffett himself measures the performance of Berkshire Hathaway Inc. (NYSE:BRK.A) in terms of growth in book value in his memorable annual letters to shareholders.

This simple and efficient business model allowed the company to do much better than its peers through the ups and downs of the business cycle, as we can see from the chart comparing book value per share over the last 10 years; Wells Fargo & Co (NYSE:WFC) has clearly outperformed other banks like Bank of America Corp (NYSE:BAC) and Citigroup. While JPMorgan Chase & Co. (NYSE:JPM) is not entirely comparable due to its bigger exposure to investment banking, the House of Morgan has also performed relatively well, much better than Bank of America and Citigroup Inc (NYSE:C), but not as well as Wells Fargo.

And this is not only a matter of past performance, Wells Fargo & Co (NYSE:WFC)’s superior quality can be observed in current profitability ratios and delinquency levels. The company has higher return on equity – ROE – and return on assets – ROA – than its peers, and it also has a lower percentage of delinquent loans – more than 30 days past due – on its balance sheets.

A high quality management team led by CEO John Stumpf, who has been with Wells Fargo for nearly 30 years, makes all the difference in the world for the company. Wells Fargo avoided the temptation of making short term profits by taking undue risks during the subprime bubble, and it kept focused on making the right decisions with a long term perspective.