Wells Fargo & Company Financial Ratios Analysis - Research Paper Example

? WELLS FARGO & COMPANY – FINANCIAL RATIOS ANALYSIS WELLS FARGO & COMPANY ANALYSIS Overview In 1852, Henry Wells and Henry Fargo founded the institution, and it has since then been expanding its operations. Wells Fargo and Company is one of the largest banks in the United States with 6,600 bank branches in 50 nations and a further 4000 mortgages and consumer finance offices. It undertakes the following activities; retail, consumer and corporate banking, insurance, leasing of equipment, investment management etc. its diversified business activities offers the bank a competitive advantage in the market (Chandler, 2006, 7). The bank has positioned itself with a niche in specialized lending activities. It is the nation’s largest consumer lending bank with profits as high as $4 billion for the third quarter of 2011. Since 2008, Wells Fargo & Company has enjoyed increased revenue year by year until 2010. The three quarters for 2011 have however, experienced an increase in its earnings. The highest rise in its net income was attained from 2008 to 2009 of 362% increase i.e. from $ 2,655, 000 to $12,275,000. This has since then stabilized at the $12million range. Financial ratios analysis Profitability ratios Return on assets The ratio was 0.96% in 2008 and has risen to 5% in 2010. The return on assets has been increasing steadily from 2009 to date. It rose sharply in 2008/2009. Investment in bonds and notes, preferred and common stocks and other securities in its diversified portfolio of assets have seen a tremendous rise in its assets for the last three years. The ratio indicates that the returns from use of assets in the company are effectively invested in to generate high earnings for the bank. A comparison with the peer shows a big difference. The peer has ROA of 2.2% currently and the trend for the 4 years is an increase from 0.8%. Return on equity The ratio rose sharply in 2008 – 2009 then has stabilized for the following years. The ratio was at 4.84 in 2008 then rose to 10.42. Currently, the range is 10 – 11. That of its peers rags behind with 2008 having a negative of 3.86, and in 2010 a ROE of 5.10. Wells Fargo and Company has doubled its ROE in comparison to its peer group. The management team of Wells Fargo & Company has done a tremendous job in investing the shareholders equity and generating a high return therefrom. The return on equity is very high compared to its industry. The management has achieved this high mark through the investment strategies it has adopted. The company retained earnings are as high as $61 million this year compared to $48.9 million in September, 2010. These have been used as internal equity for reinvestment. The company investments are seen as a high diversified portfolio in the different sectors of the economy. The 4 year analysis of Wells Fargo financials indicate that both preferred and common equity is in surplus. The company is not highly geared, but it uses its earnings for investment purposes. The year 2008 experienced a huge increase in its equity when the company added its share capital. Efficiency ratios: Net Interest Margin – This is a measure of the difference between the cost of funds and the income generated by those funds. This stands at highs of 20.66%. The increase is owed to the reduction in provisions for credit losses. Net Noninterest Margin - Measures fees and service charges relative to noninterest expenses. It stands at 9.62%. This has resulted from the decrease in operating expenses that are not directly related to credit taking. Net Operating Margin The figure stands at an increase of 30.28% in 2011. This is owed to both reduced noninterest expense and the provision for credit losses in the year. Earnings per Share This stands at 0.72 in 2011 and has increased for the 7 consecutive quarters. This indicates that the company’s efficiency is high although its revenues have decreased. Earnings Spread This stood at 6% in 2010 compared to the third quarter of 2011 of 22%. Its peers have however, managed highs of 62%. This indicates that the company has made losses previously but it is soon picking in profits. This is the highest earnings to be experienced on a quarterly basis. The competition has heightened with Citi group earning a 74% earnings increase in the last quarter, and Bank of America 18% rise in its earnings. Asset Utilization Ratio This rose to 5.31% in 2011 from 1.79% in 2008. This indicates that the company earned $5.37 for every asset held in the company. The effectiveness of generating income in the company is low. The company has not used its assets efficiently. This is however, slightly higher than its peer which is 4.87%. Operating Efficiency – Operating Revenue per dollar of noninterest expense has increased to 4.61 in 2011, from 1.54 in 2008. This implies that the bank’s productivity is increasing year by year. Employee Productivity – this is a measure of net returns per employee. Wells Fargo has an employee base of 270,000, and its return per employee has been increasing from 2008 to 2011. The productivity has increased by 345%, a rise from 9.8 in 2008 to 43.6 in 2011 net income generation per employee. This indicates that the company employees’ base has increased its productivity for this period. The company has not increased its operating expenses, salaries inclusive. Credit Risk Measures Nonperforming Loans/Total Loans This ratio has reduced from 2.06 to 1.77 from 2008 to 2011. That of the peer has however, increased from 1.18 to 1.45. The implication for Wells Fargo is that the company is utilizing its loans more effectively as compared to the peer. Net Charge-Offs/Total Loans – Wells Fargo has zero charge offs for the four years analysis period. However, the peer has a ratio of 0.02 to 0.03. This indicates that the company has not had to write off any loans for that period as it is the case for the peer. Provision for Loan Losses/Total Loans The Company ratio was 3.64 in 2008 and has decreased to 1.01. The peer’s ratio was 1.79 and has decreased to 0.83. This implies that the Company has a higher provision for loan losses than its peers. However, the ratio was highest in 2008 when the loans amounts were at the highest i.e. $55 million. Since then, the loans have been repaid and have reduced. Provision for Loan Losses/Equity Capital The ratio has reduced from 0.04 to 0.17 from 2008 to 2011. This indicates that the provisions set aside have been decreasing every year in relation to capital. However, equity capital has increased for this period. This is a good measure of the company’s debts repayment policy. Allowance for Loan Losses/Total Loans This ratio has increased from 2.36 to 2.49 for Wells Fargo. That of its peer has increased from 1.83 to 2.24. For both company, the ratio is a measure of funds set aside for loan repayment defaults. The rising inflationary rates has resulted to higher risks of default hence the increase in the allowances. Allowance for Loan Losses/Equity Capital The ratio has reduced from 0.21 to 0.15 from 2008 to 2011. This indicates that the allowances set aside have been decreasing every year in relation to capital. However, equity capital has increased for this period. This is a good measure of the company’s debts repayment policy. Total Loans/Total Deposits The ratio has increased from 0.23 to 0.71 from 2008 to 2011. This implies that the bank has reduced its deposit taking and decreased its loan amounts. The deposits were as high as $415 000 and have reduced to $101,000. The company reduced deposits shows a shift in consumer services. Liquidity Risk Purchased Funds/Total Assets The ratio has reduced from 0.64 to 0.45 from 2008 to 2011. This is an indication that the bank has reduced its reliance on purchased funds to cover shortage of funds. The deposits taken from 2008 to 2011 have reduced tremendously. Net Loans/Total Assets The ratio has decreased from 66 to 60 from 2008 to 2011. The risk associated with funds advanced to its customers is not very high. The industry holds it at less than 70%. The bank is becoming more liquid as the trend indicates. That of the peer stands at 56.77 slightly lower than Wells Fargo. Their liquidity risk is not very high. Cash and Due from FIs/Total Assets The ratio has increased from 0.06 to 0.32 from 2008 to 2011. This shows a relationship between cash from other institution and total assets year by year. The industry comparison shows that the figure should be as low as possible to indicate high liquidity. The higher the increase the more the liquidity risk increases. Cash and Government Securities/Total Assets A combination of government securities and cash to total assets ratio has increased from 0.08 to 0.38 from 2008 to 2011. This indicates overall liquidity risk of the company. Government securities are more secure than other financial institutions, yet they are not very high for this Company. Market Risk Book-Value of Assets/ Market Value of Assets The ratio stood at 5.65 in 2008 compared to 2.23. The ratio is a good indicator of the company’s assets value. They have not lost their value in the market. The ratio is higher than that of JP Morgan of 1.1 Book-Value of Equity/ Market Value of Equity The ratio has reduced from 4.3 to 1.1 from 2008 to 2011. This implies that the equity at book value is valued higher than market value. This shows over valued equity. Book-Value of Bonds/Market Value of Bonds The bond book value to market value stands at 0.25 in 2011. This shows that the bonds are undervalued for the year, but the previous years have been properly valued at 2.2 in 2008. The market risk for these bonds is low. Market Value of Preferred Stock and Common Stock The stock at book value to market value is 6.2. This shows that the year 2011 has over valued its stock. The company should aim to reduce the valuation further to maintain a low market risk. Value at Risk The value at risk has reduced from 5.94 to 2.8 from 2008 to 2011. This indicates that the value for the assets and equity in the market is low. The risk for its securities is low. Interest Rate Risk Measures Interest Sensitive Assets/Interest Sensitive Liabilities The Wells Fargo is less sensitive to interest rates than its peers as its ratio stands at 5.31% compared to that of its peers of 4.87%. Its assets base is higher than that of its peer. Maturity GAP The maturity GAP is one year to three years at a maximum for bonds and other government securities for Wells Fargo. The narrow GAP allows it to curb the fluctuations in interest rates and collect its revenues effectively. Duration Gap Wells Fargo enjoys a narrow duration gap compared to its peers. This is owed to the government funding through bonds unlike Citi group and Bank of America. The Company can borrow long term at an interest rate of 10% (Fixed). The duration gap is 3 months. Uninsured Deposits/Total Deposits This stood at 8.3 in 2009 and 63% in 2010. This indicates that the company is taking deposits and insuring most of them. This allows for risks of interests rates fluctuations and covers for losses incurred therefrom. The deposit taking of Bank of America is however, slightly higher than that of Wells Fargo. The market is also modestly coping with the high deposit takings and high credit losses. Operational risk Total assets per employee The ratio has been reducing for the period under consideration from 1.02 to 0.93. This implies the operating risk is not high rather it is small. The lower the ratio is, the higher the operational risk. Total personnel expense per employee The ratio has reduced from 1.43 to a negative figure of 0.27 in 2011. This shows that the efficiency in operations has high risk associated with personnel expense. Noninterest expense ratio This indicates operating expense to total revenue. The ratio has reduced from 0.65 to 0.21. However, this is a good indicator of operating efficiency. The lower the ratio is, the higher the efficiency of the banks operations’. Earnings Risk Standard Deviation of Net Income This stands at 8.87 for the last three years compared to a categorical value of 15.56. Its peers have high standard deviation of net income. The implication for this company is that it less volatile than its peers. Standard Deviation of ROE Wells Fargo produced a high standard deviation of 2.52 compared to the industries figure of 2.2. However, those of Citi group and Bank of America are 1.74 and 3.57 respectively. This indicates Wells Fargo has a low earnings risk as well as high profits but lags behind Bank of America. Standard Deviation of ROA This currently stands at 0.49 and lower than its peers. It is an indicator or low volatility of its funds. Capital Risk Stock Price/Earnings per Share Its stock price currently is ten times its earnings per share, a good indicator of low capital risk for the company. Equity Capital/Total Assets This ratio has increased to 9.2%. This is as a result of increase in assets over the years and equity capital, as well. The capital risk for the company is low. It is, however, higher than its peers of 7.8%. Purchased Funds/Total Liabilities This ratio has increased from 0.3 to 0.86 from 2008 to 2011. This implies that the capital risk is low since 86% is above the average industry figure of 70%. Its peer lags behind with 0.69 i.e. Citi group. Equity Capital/Risk Assets This has increased to 9.8% owing to its investment strategies of 25% in foreign investments. This increases the capital risk for the company. Other Forms of Risk in FIs Inflation Risk The company curbs inflation risk for the fixed rate of 10% on bonds by hedging for these securities. Currency or Exchange Rate Risk Wells Fargo offers over 70 different currencies predisposing it to a high risk in losses for exchange rates. It has set aside funds for hedging towards its derivatives. Political Risk The political risk has been high is continuing to rise among management and ownership of financial institutions. As a result, Wells Fargo has insured for its biggest portion of its securities. Crime Risk The crime risk associated with financial institutions is very high thus only 22% of cash and securities owed by these financial institutions are uninsured. The risk is minimized by insuring for cash and securities. Areas where managers can improve performance in the following areas Financial leverage. The company should focus expanding domestically to curb the high risks of exchange rates. However, to minimize the risks, the management should charge high foreign exchange rates. Activities/Strategy The company can adopt diversification strategies for its portfolio mix in investments. It should rely more on stocks and bonds. Operating expenses The company’s management should aim to reduce the noninterest expenses that make up the biggest percentage of operating expenses hence increase its net earnings. Asset management Wells Fargo has not completely utilized its assets base. 3.7 dollars earnings for every dollar of assets are very low. The company should diversify its investments. Bibliography Chandler, J., (2006), Wells Fargo, America, Arcadia Publishing. Wells Fargo Financial analysis and its peer. http://www.ffiec.gov/nicpubweb/nicweb/Top50Form.aspx retrieved on 13/12/2011 Read More