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.
6.Loans and deposits continue to grow
Impressively Wells Fargo & Co (NYSE:WFC) has also been able to continue to grow its loan book, which grew by 4.5% quarter-on-quarter and 4.4% year-on-year to $800 billion, making Wells Fargo the largest residential mortgage originator in the U.S.
Just as impressively, Wells Fargo & Co (NYSE:WFC) saw deposits grow by 6% year-on-year for the first quarter 2013, giving the bank a solid loan to deposit ratio of 85%. This indicates that along with its low debt-to-equity ratio the bank has a relatively liquid balance sheet and is funding the majority of its loans from its deposit base. This is a more cost effective and ultimately profitable option than using debt.
7.Performance metrics remain strong
All of the factors discussed above have seen the bank deliver some impressive performance ratios, particularly given it is effectively operating in a zero interest rate environment. For the first quarter of 2013, it reported a return on equity of 13.6%, which is a 24 basis point increase quarter-on-quarter and 145 basis point increase year-on-year.
Its return on assets also improved to 1.49% increasing by 3 bps quarter-on-quarter and 18 bps year-on-year. Thus taking the bank´s return on assets close to the magic 1.5%, with any return on assets over this amount considered to be a solid return for a bank.
8.Solid dividend history
The final attractive feature of Wells Fargo is the bank´s attractive dividend yield of around 3%, which is the same as JPMorgan Chase & Co. (NYSE:JPM)´s, but significantly higher than the token yields paid by Citigroup Inc (NYSE:C) and Bank of America Corp (NYSE:BAC), of 0.1% and 0.3%, respectively. This dividend has also been steadily appreciating in value since the end of the Global Financial Crisis in 2009, having risen four fold in value since then.
Bottom line
It is clear why Warren Buffett likes Wells Fargo & Co (NYSE:WFC), it is a well managed institution that continues to perform consistently and deliver value for shareholders. This performance can only continue to improve, because as the largest mortgage originator in the U.S. any improvement in the U.S. economy and housing market will drive further loan growth. Overall, Wells Fargo is a stock that should form part of any long-term investment portfolio, delivering solid long-term growth while paying a consistent dividend.
The article Wells Fargo: Why It Should Be a Part of Any Long-Term Investor’s Portfolio originally appeared on Fool.com.
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