Potentials of the Wells Fargo & Company as an Employer - Case Study Example

 Introduction The purpose of this report is to apprise you of the potentials of the Wells Fargo & Company, a publicly held institution in the banking and financial services industry, as an employer for a fresh graduate in a business course. The report begins with a brief narration of important events in the company history, followed by an overview of its position within the industry and its relative performance against its competitors. This is followed by a description of the firm’s products and services, its working environment and the benefits it affords its employees, a brief discussion of its recent changes and future directions, and a cursory look at its financial performance. The final recommendation is thereafter included in the conclusion. Company History Wells Fargo and Company has its headquarters at 420 Montgomery Street, San Francisco, California. The firm’s forerunner was founded in 1852 in New York City by Henry Wells and William Fargo. It was originally conceived as a “banking and express services” company, it eventually began offering services in the West where miners, farmers and ranchers, had begun to migrate. In 1888, began offering “Ocean to Ocrean Services,” consisting of banking and express services to target the needs of pioneers in the Gold Rush. Even during its early beginnings in the 1850s, Wells Fargo already served and employed African Americans, Latinos, and women (today, about two-thirds of the banks employees are female, among whom are some of the Company’s top ranking executives. Through the years the bank has grown in tandem with American History. As of 31 December 2010, the company had 9,000 banking stores located all in 39 U.S. states and the District of Columbia. Competition/Industry Information The firm is one of the major publicly listed companies under the Industry Center classification Money Center Banks. It is a diversified financial holding company that extends, through its different subsidiaries, banking services for retail, commercial, and corporate clientele mostly in the United States. It is strategically segmented into three areas: Community Banking, Wholesale Banking, and Wealth, Brokerage and Retirement. The firm operates in a highly competitive industry which is prone to shocks and presently undergoing adjustment to meet tighter regulatory standards under Basel III. In the United States, the passage of the Dodd-Frank [Wall Street Reform and Consumer Protection] Act promises to impose more stringent controls to avoid a repetition of the previous financial crisis. In the following tables are statistics pertaining to the structure and performance of the industry, as of November 2011. Information was provided by Thomson Reuter financial services through the Yahoo Finance online advisory. Industry Statistics (Money Center Banks) Market Capitalization 39,742 B Price/Earnings (PER) 11.3 Price/Book (PBV) 1.2 Net Profit Margin 10.2% Price to Free Cash Flow 7.9 Return on Equity 6.7% Total Debt to Equity 18.0 Dividend Yield 3.3% The market capitalization pertains to the total value of the industry taken from the number of shares of listed companies in this industry sector, multiplied by their last traded price. The Price to Earnings Ratio, or PER, and Price to Book Value, or PVB, are the average ratios of the stock’s market price to the earnings and the accounting value per share respectively. The other indicators are consistent with their textbook definitions, but are computed as the averages of the respective ratios through the different firms in the industry. The above ratios will be useful as a basis for comparison in the financial analysis of the company later in this discussion. The next table provides information of Wells Fargo in comparison with the industry leaders. The names pertaining to the company codes are provided in the legend following the table. (Note: PEG ratio is the Price/Earnings to Growth ratio.) WFC vs. Industry Leaders Statistic Industry Leader WFC WFC Rank Market Capitalization JPM.L 126.35B 132.37B 36 / 230 P/E Ratio (ttm) BUBA.L N/A 9.30 93 / 230 PEG Ratio (ttm, 5 yr expected) CE.MI 7.89 0.68 40 / 230 Revenue Growth (Qtrly YoY) PRO.MI 143.90% 2.20% 147 / 230 EPS Growth (Qtrly YoY) BFE.MI 1519.70% 20.00% 57 / 230 Long-Term Growth Rate (5 yr) LLOY.L 61.15% 13.05% 27 / 230 Return on Equity (ttm) BRIO.BA 51.22% 11.74% 78 / 230 Dividend Yield (annual) MFG 10.30% 1.80% 17 / 230 JPM.L - JPMorgan Chase & Co. BUBA.L - Banco De Oro Unibank, Inc. CE.MI - Credito Emiliano PRO.MI - Banca Profilo BFE.MI - Banca Finnat LLOY.L - Lloyds Banking Group BRIO.BA - Banco Santander Rio B MFG - Mizuho Financial Group, Inc. The second and third columns of the table pertain to the leading firm in the industry, while the fourth and fifth columns show the indicator value for Wells Fargo and its rank in the industry. The highlighted rankings show where WFC placed within the upper quarter of the industry, and thereby shows exceptionally good performance. The company places well within the upper half of the industry for nearly all indicators, except in Revenue Growth (as of the third quarter on a year-on-year basis). Wells Fargo revenue grew by only 2.2% from the third quarter of last year to this year’s third quarter, compared to the industry leader at 143.9%. This is not necessarily disadvantageous, because the high revenue growths for the year then ended may have simply been due to a lower basis during the previous year. An examination of the comparative financial statements of Wells Fargo in the Appendix will show the revenues for the past three years, which are well sufficient to cover the firm’s costs and provide a healthy profit. Products & Services The conglomerate offers a whole range of products and services for the three segments it presently services. The Yahoo Finance Wells Fargo & Company report provides a list of the company’s offerings which in the interest of technical accuracy and detail are reproduced hereunder. Under Community Banking, the firm offers deposits including savings and time deposits; checking, market rate and individual retirements accounts; and debit cards. Loans offered include lines of credit, auto floor plans, equity lines and loans, health savings account, and credit cards. Other services include equipment leases, real estate financing, small business administration financing, venture capital financing, cash management, payroll services, retirement plans, loans secured by autos, and merchant payment processing services; purchases sales finance contracts from retail merchants; and several funds and investment management services. Under the Wholesale Banking segment, Wells Fargo provides such services as commercial and corporate banking products and services, including commercial loans and lines of credit, letters of credit, asset-based lending, equipment leasing, international trade facilities, trade financing, collection services, foreign exchange services, treasury and investment management, institutional fixed-income sales, commodity and equity risk management, insurance, corporate trust fiduciary and agency services, and investment banking services. Further included in this segment are banking products for commercial real estate market, and real estate and mortgage brokerage services. Finally, under the Wealth, Brokerage and Retirement segment, the firm offers financial advisory, brokerage and institutional retirement and trust services. The foregoing information had been culled from Yahoo Finance (2011), based on data from Thomson Reuters and other databases. Because of the diversity of services and the wealth of expertise that Wells Fargo offers its various markets, the firm appears well-placed in the market for financial services within the United States, such that when demand in a particular market becomes weak, the company is capable of sustaining its business through the other types of customers it services. However, since the company operates mainly in the United States and not in other countries, it is particularly prone to the US downturns without being able to offset its losses in revenues and profits locally with what would have been revenues and profits realized in other countries, particularly emerging markets. The company may have been better off if it had been geographically diversified, to take advantage of financial markets abroad with negatively correlated economic cycles as that of the U.S., as a strategy for risk management. Working Environment/Benefits The company presently has a roster of 263,800 persons under its employ. The large workforce presents a challenge for Wells Fargo in so far as training, organization, and supervision are concerned. Wells Fargo values people as its competitive advantage. The firm’s stated policy is to actively seek out people from diverse backgrounds and cultures, to provide them the training and knowledge they need, and to provide them the necessary discretion, accountability, and responsibility in discharging their duties. It is the position of the company that when their employees are “properly incented, rewarded, encouraged and recognized – they are even more satisfied with their jobs, provide better service, generate more sales, and produce even better business results” (People as Competitive Advantage, Wells Fargo 2011). The key positions for entry level personnel include teller, phone banker, home mortgage consultant, program or project manager, personal banker, information security analyst, web developer and applications/systems engineer. The highlights of the Company’s benefits package include the following: Benefit Description Paid Time Off PTO may be used for vacation, parent-teacher conference, doctor’s appointment, or any event at the discretion of the employee 401 (k) Plan Wells Fargo will match your contribution dollar up to 6% of your eligible pay on a quarterly basis, after 1 year of service. At its discretion, WFC may make a profit sharing contribution up to 4% of the employee’s annual pay based on company performance. Discounts & Savings Employees may avail of special discounts on Wells Fargo financial products and services typically offered the best customers. Wellness Benefits LifeCare.com provides counselling, education, and referral services on a wide range of issues and topics. Commuter Benefits Employees may choose to pay for mass transit or parking on a pre-tax basis. Tuition Reimbursements Employees are encouraged to continue their professional development. Wells Fargo will reimburse eligible tuition expenses up to $5,000 annually. Adoption Reimbursements Wells Fargo provides up to $5,000 for eligible adoption-related expenses through its Adoption Reimbursement Program. Scholarships for Dependent Children Wells Fargo offers several scholarships to children of employees, who can apply and receive awards ranging from $1,000 to $3,000. Adopted from Our Benefits, Wells Fargo website, 2011. Recent Changes/Future Direction There have been both positive and negative developments in the company’s recent history. On the positive side, WFC has continued to push its electronic consumer finance services, with more than 12,196 ATMs to date, including the internet and other distribution channels through North America. Furthermore, it acquired Wachovia Corporation in 2008, thereby becoming the fourth largest bank in the US (Datamonitor, 2011, p. 5). In 2010, the firm’s average retail banking household included 5.7 products, an increase over 5.4 products in 2009; eventually, the firm intends to create 8 products per banking household customer. Another hopeful development is the company’s rise in Tier 1 capital, bringing the quality of its finances to well within Basel standards (Datamonitor, 2011, p. 6). Negative developments included some risky shifts in the company’s earning asset mix from loans to more liquid assets because of the weaker loan demand in 2010, causing some pressures on the net interest margin (NIM). There had been also some weakening in the firm’s expense management, causing a slight deterioration in the firm’s efficiency ratio. Furthermore, its recent acquisition, Wachovia, has experienced some losses which might exceed the experts previous estimates. While these losses are related to Wachovia’s business before its take-over by WFC, as new owner WFC will have to deal with the adverse regulatory and legal challenges that result. Financial Analysis Wells Fargo and Company is in the financial institutions and services industry, and therefore its prospects for future growth are strongly linked to its financial performance. Furthermore, nearly all bases for industry regulation are linked to the health and quality of its financial resources. The pertinent accounts of the company’s balance sheets and income statements for the past three years (ending 31 December) are shown in the Appendix and may be referred to for analysis. The key ratios and statistics are shown below for purposes of discussion. Key Statistics WFC Valuation Measures Market Cap (intraday)5: 132.37B Enterprise Value (Nov 15, 2011)3: 155.36B Forward P/E (fye Dec 31, 2012)1: 7.75 PEG Ratio (5 yr expected)1: 0.68 Price/Sales (ttm): 1.82 Price/Book (mrq): 1.04 Enterprise Value/Revenue (ttm)3: 2.13 Financial Highlights Fiscal Year Fiscal Year Ends: 31-Dec Most Recent Quarter (mrq): 30-Sep-11 Profitability Profit Margin (ttm): 20.83% Operating Margin (ttm): 35.65% Management Effectiveness Return on Assets (ttm): 1.23% Return on Equity (ttm): 11.74% Income Statement Revenue (ttm): 72.87B Revenue Per Share (ttm): 13.82 Qtrly Revenue Growth (yoy): 2.20% Net Income Avl to Common (ttm): 14.37B Diluted EPS (ttm): 2.7 Qtrly Earnings Growth (yoy): 21.40% Balance Sheet Total Cash (mrq): 164.35B Total Cash Per Share (mrq): 31.16 Total Debt (mrq): 183.99B Book Value Per Share (mrq): 24.14 Cash Flow Statement Operating Cash Flow (ttm): 33.76B Source:YahooFinance.com Data from Thomson Reuter, EDGAR Online Wells Fargo’s market capitalization is at US$132.37B, while the total market capitalization for the industry is US$39,742B; thus, Wells Fargo comprises only 0.3% of the industry in terms of size. Its enterprise value is slightly higher than its market capitalization, however, meaning that the price of the stock in the market is currently undervalued, and may be expected to rise. The forward PER is shown to be 7.75 (note that the PER earlier shown at 9.3 refers to the PER as of the last reporting date, while the forward PER is based on the expected earnings at the end of the current operating year). For the industry, however, the forward PER is pegged at 11.3, according to Thomson Reuters financial services. Since the PER of Wells Fargo is lower than the industry, this means that the price of the company is much cheaper than it should be. For every dollar of earnings, the stock fetches a lower price in the market, making it a good investment in the long term. The same may be said of the PBV, which for the industry is 1.2 and the Company is 1.04. Wells Fargo’s price may therefore be expected to rise when investors return to the market. That Wells Fargo is a good investment is further supported by its profit margin. WFC has a 20.83% net profit margin, compared to the industry’s 10.20%. Thus, the Company is twice as profitable as the industry. The return on equity (ROE) is also stronger for the Company, which has earned an 11.74% ROE compared to the industry’s 6.7%. A quick glance at the comparative income statement in the appendix shows that Wells Fargo recorded strong increases in profits and revenues from the year ending 2008 to 2009, showing the fast recovery of the firm from the negative effects of the financial crisis. Such is usually the sign that the company has strong underlying fundamental strength. Conclusion Wells Fargo and Company is a business firm with financial strength, good post-crisis performance, favourable prospects for growth, and most importantly a sustainable HR policy and excellent benefits for its employees, including training and staff development. This company should be favourably considered as a potential employee for the school’s graduates and may be recommended as such. References: Conrad, L (2010 Feb) “Wells Fargo: On The Front Lines of the Culture Wars.” On Wall Street. PP. 22-26. Available from EBSCO Datamonitory (2010 Sept). Wells Fargo & Company. Available from EBSCO Datamonitor (2011) Wells Fargo & Company SWOT Analysis. Available from EBSCO. Wells Fargo & Company official website (2011), Accessed 10 November 2011 from https://www.wellsfargo.com/ “Wells Fargo Unveils Wells Fargo Capital Finance.” The Secured Lender (March 2010), pp. 18-19. Available from EBSCO. Wells Fargo 2011 2Q Wells Fargo Today. Available for Wells Fargo website. Appendix Wells Fargo and Company Abbreviated Financial Statements Read More