Wells Fargo is among a small handful of banks that seem to do everything right, from keeping expenses low to investing in digital technology to conservatively managing credit risk. As a result, when its executives talk, bank stock investors would be smart to listen.
The chief financial officer of Wells Fargo, John Shrewsberry, spoke at last week's Barclays Global Financial Services Conference. Here are the three most important things he had to say:
1. Net interest incomeLow interest rates are the bane of the bank industry's existence. While they keep funding costs low, they also weigh on a bank's yield from earning assets. The net result is that most banks have seen their net interest margins, calculated by dividing a bank's net interest income by its average earning assets, plummet over the past few years.
Wells Fargo is no exception to this. Since the beginning of 2010, its net interest margin has fallen from 4.27% down to 2.97% in the second quarter of the current year. This means that its portfolio of loans and securities is earning roughly two-thirds of what it was generating in the immediate aftermath of the financial crisis.
Wells Fargo has nevertheless been able to expand its net interest income, which is the amount of money it generates from its interest-earning assets less the bank's cost of funds. As Shrewsberry explained:
2. Benefits of diversificationWells Fargo has long appreciated the benefits of a widely diversified business model, claiming to have more than 90 separate business lines. Shrewsberry offered a tangible example of why this matters:
3. Credit quality at a two-decade lowFinally, while credit quality is something that investors should always keep in the back of their heads, it isn't an issue right now. Even the least prudent banks in the lead-up to the financial crisis have since cleaned up their acts from a credit quality perspective. Thus, given that Wells Fargo has consistently been one of the industry's best managers of credit risk, it should come as no surprise that its loan book is in better shape than it's been in for multiple decades.
Again, according to Shrewsberry:
In sum, while Shrewsberry offered a number of interesting tidbits for investors to sink their teeth into, his presentation also made it clear that Wells Fargo is sticking to its tried and true business model that's served it so well throughout the years.
The article 3 Things Wells Fargo Wants Investors to Know originally appeared on Fool.com.
John Maxfield has no position in any stocks mentioned. The Motley Fool owns and recommends Wells Fargo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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