Tags: Buffett | Wells | Fargo | WFC

Buffett Wells Fargo Stock Bet a Winner

By    |   Thursday, 06 Oct 2011 01:42 PM

Wells Fargo (WFC) is proving to be one of the healthiest of the nation’s large banks. You would expect nothing less from Warren Buffett, whose big bet on Wells Fargo stock turned his company into the bank’s largest shareholder.

One longstanding advantage for Wells Fargo is a lower cost of funds than competitors. The bank has $854 billion of low cost deposits that back 80 percent of its earnings assets, Morningstar reports. Non-interest-bearing deposits make up a significant 24 percent of total deposits.

It’s no surprise then that Wells Fargo’s net interest margin totaled 4.01 percent in the second quarter, much higher than its rivals. Also during that period, loan losses dropped for the sixth straight quarter, allowing the bank to take $1 billion out of loan loss reserves.

Now Wells Fargo is embarking on a major cost-cutting effort, which makes a lot of sense given that the weak economy limits revenue opportunities. The bank plans to trim expenses by about 12 percent, or $1.5 billion per quarter, by the end of 2012. That would create $6 billion of savings a year, adding about $4 billion to after-tax profits.

"We think our opportunities to operate more cost effectively are just as promising as the growth opportunities that we believe lie ahead of us," CEO John Stumpf said in a conference call discussing second-quarter earnings.

Moody’s downgrade

Moody’s Investors service recently downgraded Wells Fargo’s credit rating, because the government is "more likely now than during the financial crisis to allow a large bank to fail.” But Wells Fargo said Moody’s move "solely reflects a change in their assumption regarding systemic support."

The bank’s profit soared 30 percent in the second quarter to $3.73 billion from a year earlier. Revenue slipped 4.7 percent to $20.4 billion

Standard & Poor’s analyst Erik Oja has a hold rating on Wells Fargo shares. “We expect total
revenues to be down 5.7 percent in 2011,” he writes. “However, for 2012, we see net interest income rising 2.1 percent, and core revenues increasing 1 percent.” The company next reports Oct. 17.

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Wells Fargo (WFC) is proving to be one of the healthiest of the nation s large banks. You would expect nothing less from Warren Buffett, whose big bet on Wells Fargo stock turned his company into the bank s largest shareholder. One longstanding advantage for Wells Fargo...
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Thursday, 06 Oct 2011 01:42 PM
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