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Morningstar | Wells Fargo Is Still Dealing With Legal and Regulatory Fallout In 2019

Wells Fargo remains one of the top deposit-gatherers in the United States, even after years of negative headlines related to the bank's scandals. Its strategy historically rested on deep customer relationships, sound risk management, and operational excellence. While the operational risk management and excellence has been questionable of late, we'll note that the bank has still easily out earned its cost of equity for decades, and the bank continues to do so today. Wells Fargo has consistently paid less for balance sheet funding than most of its competitors for decades, arguably has the best branch network in the U.S., excels within the middle market commercial space, has a strong advisory network, and as a result has generally generated more revenue per dollar of assets than most peers over time. We still believe the bank has an attractive lineup of business units and a core group of loyal, longtime customers. Indeed, account closures were well controlled even during the worst of its sales problems, demonstrating that customers are willing to stick with the bank. This is not to say that Wells does not still face many issues, including getting the asset cap removed, regaining a more positive reputation among potential advisor clients, dealing with mortgage headwinds, and generally returning to offense instead of constantly being on defense. Unlike its major competitors, Wells is not a top player in the capital markets. Its business model is more akin to a regional bank than a money center institution. Wells is also almost entirely U.S. focused. These factors can make the business simpler, and results less volatile. For these reasons, we believe Wells deserves a lower cost of capital than its money center peers.Wells Fargo’s sales culture overheated in recent years, and the bank is still dealing with the fallout. However, customers have not abandoned Wells, and we think new programs focused on deepening active relationships will actually generate more revenue and waste less employee time. We continue to monitor the franchise for signs of permanent impairments, but thus far think it is only a matter of time before the bank returns to some form of normalcy.