Wells Fargo in Financial Services Industry - Case Study Example

Wells Fargo Name Course Date Tutor Wells Fargo Introduction Wells Fargo is a diversified community based corporation which deals in financial services. The company was founded in 1852 and its headquarters in on the west coast in San Francisco. It deals with investment, insurance, investments, mortgage and consumer as well as, commercial finance which is provided to over 8,700 locations and over 12,000 ATMs worldwide. Apparently, the company serves one in three homes in the country and was ranked 29th according to Fortune magazine. The company utilizes their mission and values in guiding the growth and success of the firm. The aim is the satisfaction of the client’s financial requirements and aids them in succeeding on the financial plain. Because of this, it is perceived as a deluxe level financial services firm in their markets and one of the greatest corporations in the world. The company presents with six main values which happen to be based according to their vision and these provide the foundation for the majority of their operations in the financial scene. For one, they value and support their clients perceived as a competitive advantage and try to support people as a competitive advantage. The company also strives to achieve the highest ethical standards with the team members and the clients as well as, the shareholders. The third thing is they respect the client and try to base decisions according to what is right form them in everything that they do. Lastly, the firm strives to make risk management one of the competitive advantages to the benefit of the company in order to make sure there are suitable checks in order to reduce levels of exposure to the client and keep the market position. Financial Services Industry According to reports from financial analysis firms, market leaders were based according to the total assets that a company controlled. The assets were utilized to show size and ultimately, performance. As such, the Bank of America was found to be the leader in the commercial banking industry whose share in the market share stood at 21 percent, asset based. J.P. Morgan, Citibank and Chase Bank are some of the main challengers in the market. The levels of their asset base are more than that of bank of America at 2 percent to 50 percent (Sherraden 12). According to the reports, U.S Bank and Wells Fargo are the market followers. There exists stiff rivalry in the financial services industry directed rivals such as the banks but indirect competition from ING Direct. These are firms which provide several financial services including asset management, internet banking, insurance and other services. There do not seem to be gaps in the market to fill it. Research and Data sources The major objective would to perform a comprehensive financial analysis of the corporation considering the use of financial ratios. In order to effectively assess the financial health of Wells Fargo, the financial performance has been compared to two main competitors which in this case would be JP Morgan Chase as well as Bank of America (Fair Disclosure Wire 1). Financial ratios are adequate as a tool in the examination of the true presentation of the company’s performance. These ratios depend on two major financial statements which are available from the public domain of any corporation and these would include the financial and income statements (KPMG, 2015). The analysis of these ratios would depend on the main financial statements which are available from the public domains of any corporation and these include income and financial statements. Analyses of financial ratios allow senior management to evaluate and select the best possible direction for the firm. At the same time, the ratios also allow for comprehensive comparisons of actions as taken by the main management before and after implementation by numbers. Financial Analysis and Review of Wells Fargo The balance sheet of the company seemed to grow by 11 percent in 2014 by 1.7 trillion dollars considering the company increased their position as concerns liquidity. The firm also improved on the quality of the assets. The deposits grew by 8 percent and the costs of deposits seemed to reduce. The company grew the loans on a year rolling approach for the 14th consecutive quarters despite a scheduled override a portfolio that wasn’t strategic. This business segment reduced by decreased twenty billion dollars within the year while the main loan business increased by 60.3 billion dollars from the previous years the liquidity position of the company has remained strong with increased expectations on the regulatory front, the company has also added to their position in the years. The amount of deposit has grown significantly and steadily from 89.1 billion dollars in 2013 (KPMG, 2015). This increase reflected a lot of growth across both the business and consumer enterprises. The company also grew their consumer checking customers by 5.2 percent. The main small enterprises and banking checking clientele grew by 5.4 percent. The ability of the firm in growing the main clientele is crucial to their results considering that the clients have enhanced interactions and higher level of cross selling, so they double profits compared to the clients considered non- primary. Earnings and Performance The net income of the company for the year ended 2014 was 23.1 billion dollars, which is an increase from 21.9 billion dollars in 2013 and 18.9 billion dollars in 2012. The earnings for the year ended 2014 reflected an effective business policy that was executed effectively. The financial performance in 2014 also benefited from a reduction by 914 million dollars in the provision of the company pertaining to credit losses. This reflected a strong credit performance. The total revenue recorded grew to 84.3 billion dollars in 2013 from 83.8billion in previous year. The diversified sources of revenue as generated by their business have proceeded to be balanced between the net interest income as well as, the noninterest income. Noninterest income was 40.8 billion dollars in 2014 which is 48 percent of revenue. This is related to 41 billion dollars the previous year that represented 49 percent of the revenue. The decrease in 2014 was because of a decline in the mortgage banking income by 27 percent. In turn this was because of decreasing gains on the mortgage loan originations offset through higher trust and investment fee incomes (KPMG, 2015). The non-interest expenses were 49 billion dollars in 2014 and this is related to 48.8 billion dollars in 2013 as well as, 50.4 billion dollars in 2012. This increase in non-interest expense for 2014 as compared to the previous year was representative of higher salary and other expenses. The following text is a comparison of three corporations, through which we analyze financial ratios of profitability, growth, liquidity and working capital. These companies will include JP Morgan and Chase, Bank of America and Wells Fargo. Profitability Wells Fargo Bank of America JP Morgan and Chase 2012 2013 2014 2012 2013 2014 2012 2013 2014 5 Year Average Return On Assets(Fundamental) 0.9693 1.2099 1.3049 0.06 0.19 0.53 0.85 0.92 0.74 Asset Turnover(Fundamental) 0.0667 0.0598 0.055 0.04 0.04 0.04 0.05 0.04 0.04 Return on Invested Capital(Fundamental) 8.1005 6.8605 6.1872 no fill no fill no fill no fill no fill no fill EBIT to Net Sales(Fundamental) no fill no fill no fill no fill no fill no fill no fill no fill no fill Return on Assets(Fundamental) 1.3809 1.485 1.4363 0.13 0.47 0.18 0.86 0.70 0.81 The work of the profitability ratio is to evaluate the probability which is the revenue that is generated as compared to the expenses that are incurred by the company for a specific period of time. A higher value for most of the ratios which are provided is an indication that the company is doing well as a lower ratio is an indication of the reverse. The above table is an illustration of profitability ratios for Wells Fargo and two of its main rivals which are Bank of America and JP Morgan and Chase. According to this table, only three of the ratios are viable for utilization as the EBIT to Net Sales and the returns on invested capital do not apply for two or all three of the financial institutions. From the table, we can see that Wells Fargo is doing quite well in all of the categories, far beyond the main competitors. The 5 Year Average Return on assets is a description of the rate of asset returns during the five years of the financial overview. Bank of America performed the worst of the three firms with figures hardly going above 0.5 until 2014. JP Morgan and Chase come in second with 0.92 as a peak in 2013 but it declines slightly to 0.74 in 2014 (JPMorgan Chase & Co 2016). Wells Fargo seems to be head and shoulders above the rest with figures above 1.2 in 2013 and 1.3 in 2014 (Bank of America Corporation, 2016). The other ratios include asset turnover and the return on assets. Again, higher proportionality means better performance. Morgan JP and Chase seems to perform better than Bank of America holding the middle ground and Wells Fargo is better than both of them in each setting. Liquidity Profitability Wells Fargo Bank of America JP Morgan and Chase 2012 2013 2014 2012 2013 2014 2012 2013 2014 Quick Ratio(Fundamental) 1.08 0.922 0.86 0.35 0.34 0.34 0.14 0.14 0.35 LT Debt to total assets 37.0865 40.4876 42.5083 no fill no fill no fill no fill no fill no fill Liquidity is about assessing the ability of the corporation concerning honoring the short term loans or obligations. Most of the time, a higher ratio is better because it means that either of the financial companies is able to pay off the short term debt in time before the debtors come for their dues. Liquidity is also an illustration of financial health by illustrating how quickly a company is able to avail flexible funds which may be in the reserve accounts, for the purpose of projects without necessarily sourcing loans. The table above shows the quick ratio as the only viable means of comparison for the three companies. Apparently, Wells Fargo is still ahead of the rest of the companies over the three year period. Bank of America is the least performing of the three companies with liquidity levels for the current ratio that only go above 0.3 once. JP Morgan has a better illustration of the liquidity levels however; it still does not go above 0.4 as the average is an estimated 0.34 for the quick ratio. Wells Fargo is the only one that goes above 1.0 (JPMorgan Chase & Co 2016). As such, it is better able to capitalize on its assets and convert assets to issuable bills. It is also the most likely to undertake on new projects without having to source long term loans. Growth and Development Growth Wells Fargo Bank of America JP Morgan and Chase 2012 2013 2014 2012 2013 2014 2012 2013 2014 Net fixed asset turnover 0.6626 0.601 0.5182 0.08 0.08 0.08 0.04 0.04 0.04 Sales to total assets 0.0641 0.0578 0.0524 0.04 0.04 0.04 0.05 0.04 0.04 Earnings per share 2.188 2.838 3.32 10.35 — — 3.49 26.00 18.54 The work of the growth ratio is to indicate the growth rate of the firm over a specific period of time. According to the table above, the period is indicated for three years from 2012 to 2013 (Bank of America Corporation, 2016). The overall growth rate in the financial industry has had some bumps but it is nonetheless steady for most corporations. As considered in liquidity and profitability ratios, the higher the figure, the more positive the implication about the position of the company in question and vice versa. The net fixed asset turnover is very important as it provides an idea of fixed asset growth of the company over the years. These figures are then compared against the next year to find a trend line. If the trend line is going upwards then it can be assumed the firm is growing with each financial period. The opposite is true as well. From the trend lines one can assume a rate or future of decline or success depending on the severity of the gradient. This time, Bank of America was the lead in net fixed assets turnover. It provided a lead of approximately 0.8 considering 0.4 from JP Morgan and an average of 0.601 that declined slightly to 0.5182 from Wells Fargo. The Bank of America performs exceptionally better from this perspective as compared to Wells Fargo or even rival JP Morgan even though this is an indication of growth and not asset levels and the levels stagnated instead of grew for both of them. in the sales to total assets, Wells Fargo was outperformed by Bank of America and JP Morgan Chase from 0.0641to 0.0524 as compared to a stagnation of 0.04 for Bank of America and 0.04 for JP Morgan (JPMorgan Chase & Co 2016). The only point of progress for Wells Fargo in the growth department was the earnings per share which was 2.188 to 3.32. However, it does not compare to the increased rate of earnings for JP Morgan and Chase over the same period which went from 3.49 to 26.0 in a year. Granted, there was a severe decline but they still managed to keep it within double digits which are more than Wells Fargo did with its growth earnings per share finally leveling off at 18.54 (Bank of America Corporation, 2016). The three companies seem to be suffering from the conditions in the economy because there is hardly a point of steady growth within the 3 year period from 2012 to 2014. Each ratio from the sales to total assets to the net fixed turnover is not allowing for steady growth. In both of the ratios, the three companies are either stagnating over the period, or they are declining steadily. When it comes to the earnings per share though, it is a different story. The corporations are either steadily gaining or are erratically going from profit to loss as is the case with JP Morgan and Chase. For 2012 to 2013 the gains per share went from 3 to 26 in a year then they slumped back to 16. This is not the best indication of a reliable growth earner as well. Despite the slow but sure, process, Wells Fargo wins out as the most reliable option in this department as well. Discussion According to other researchers as well the Wells Fargo stock has lower volatility as the net adjusted earnings have increased by more than 4 percent between the fiscal years of 2013 and 2014. Bank of America’s on the other hand have declined by up to 58 percent since 2012; Wells Fargo is the only financial institution to report steady increases consecutively each year. JP Morgan and Chase as well as other rivals, Citicorp, and PNC financial have bounced up and down. Wells Fargo when compared is like a consumer that has a diversified portfolio. The earnings of the institution are stable for the most part because it has 90 lines of business which happen to be divided according to wholesale banking, brokerage, retirement and consumer lending. If confidence pertaining to the customer counts, then Wells Fargo would attain the top position for the strongest financial services list. It may be rewarding to see the market cap develop; it is a result of what is happening on a day to day basis and what has been focused for years. In the case of Wells Fargo, it is the customer and the means that they require so that they can succeed. The investors of the firm need to watch out for any changes in the main indicators as illustrated within the paper such as the growth, profitability and liquidity. They would indicate shutdowns for example, on the mortgage banking and earnings growth department. However, the slow and steady strategy is only a disadvantage during the early days before establishment of a firm especially in the financial services industry. Considering that Wells Fargo is at the peak of its game, it is built like a sturdy castle so more of the steady strategy cannot hurt it in any way. Apparently, the future only shows clear skies for the firm stock. According to Pragnya Pattnaik, who happens to be one of the top senior analysts at The Edge Consulting Group, Wells Fargo is constantly providing strong fundamental performances and enjoys higher than standard valuation as compared to rivals within the industry. This has been proven over the course of time. This is justified because of the firm’s better profitability and diversified nature of business which assures consistent earnings. Reference list KPMG. Wells Fargo; Financial Review. Investor Relations. 2015. Retrieved online < https://www08.wellsfargomedia.com/assets/pdf/about/investor-relations/sec-filings/2014/exhibit-13.pdf> Sherraden, Michael. Inclusion in the American Dream: Assets, Poverty, and Public Policy. New York: Oxford University Press, 2005. Fair Disclosure Wire. "Event Brief of Q3 2005 Wells Fargo & Company Pre-Recorded Earnings Conference Call - Final. " Fair Disclosure Wire 18 October 2005 n/a. ABI/ INFORM Trade & Industry. ProQuest. 14 Mar. 2007 “JPMorgan Chase & Co”. Morningstar Incorporated. 2016. Retrieved online < http://financials.morningstar.com/ratios/r.html?t=JPML> “Bank of America Corporation”. Morningstar Incorporated. 2016. Retrieved online < http://financials.morningstar.com/ratios/r.html?t=BAC®ion=usa&culture=en-US> Read More