Wells Fargo & Co (WFC): The Bottom Line

Since the Global Financial Crisis, banks have been on the nose for many investors, yet opportunities abound in the sector for investors who are willing to do their homework. One U.S. bank that came through the crisis in relatively good shape is Wells Fargo & Co (NYSE:WFC), and it is no accident that Warren Buffett is now the largest individual shareholder in the company. According to Berkshire Hathaway Inc. (NYSE:BRK.A)’s latest regulatory filing, he holds around 400 million shares in the bank. It is also my preferred investment for exposure to the U.S. major banks, in preference to Citigroup Inc (NYSE:C), Bank of America Corp (NYSE:BAC) and JPMorgan Chase & Co. (NYSE:JPM). So what is it that makes Wells Fargo & Co (NYSE:WFC) so appealing to Buffett and a solid investment for those investors seeking exposure to the U.S. banking sector?

1.Asset quality remains high and continues to improve

The bank over the last 2 years has focused on improving its asset quality and reducing its non-performing loan ratio, which has fallen by 12 basis points quarter-on-quarter and 44 basis points year-on-year to 2.44% in the first quarter 2013. This is well within the acceptable parameters and indicates that the bank is managing risk within its loan portfolio well.

While all of the major U.S. banks have also focused on improving their asset quality since the crisis, Wells Fargo & Co (NYSE:WFC)does not have a large pool of legacy assets like Citigroup Inc (NYSE:C) or Bank of America Corp (NYSE:BAC), nor the additional economic and accounting costs these incur.

2.Strong balance sheet with a low degree of leverage

Of the top four major banks, Wells Fargo & Co (NYSE:WFC) has the lowest level of leverage with a debt to equity ratio of around 1.2, which as the chart below illustrates is lower than its major peers.

WFC Debt to Equity Ratio data by YCharts

3. Tight cost control

For the first quarter of 2013 non-interest expense was down by 4% quarter-on-quarter and 5% year-on-year to $12.4 billion. This saw Wells Fargo & Co (NYSE:WFC) report an impressive efficiency ratio of 58%, which is superior to JPMorgan Chase & Co. (NYSE:JPM)´s 63%, Citigroup Inc (NYSE:C)´s 61% and Bank of America Corp (NYSE:BAC)´s 77%.

4. Capital adequacy is high

Another attractive indicator is Wells Fargo’s solid capital adequacy, with the bank reporting a tier one common capital ratio of 10.38%, which is a 26 basis point increase quarter-on-quarter and a 40 basis point increase year-on-year. This is well above the minimum regulatory requirements and compares favorably to its peers as illustrated below.

Source data: Wells Fargo, JPMorgan, Bank of America, Citigroup Financial Filings 1Q13.

5.Net income continues to grow

Despite reporting a 4% drop in revenue quarter-on-quarter and 8% year-on-year to $21 billion, the bank´s profitability has continued to grow since the first quarter 2012, with the bank reporting net income of $5.2 billion as the chart below illustrates.

Source: Wells Fargo 1Q13 Financial Supplement.

This continuing growth in net income, despite falling revenue can be attributed to the factors discussed above, particularly the low level of non-performing assets and the bank´s strong control of costs.