Wells Fargo: WFC

The asset cap on WFC is hurting them so much, they could not take advantage of all the deposits that could flow into them. Otherwise, WFC has a low funding cost, i.e., they have largest % of deposits below $250K. If FED relents on lifting the asset cap for WFC, it will be a big boost to their earnings. Assets for the banks are loans, bonds, etc. Deposits are liabilities. Now, in the absence of asset cap lifting, WFC is flush with capital, i.e., they are overcapitalized. the only options they have is returning the cash. After stress test I am expecting them to buyback. Amongst the big 4, WFC will be the first bank to do buyback.


The below table shows the impact of the raising interest rates on the investments. I am pretty sure this is same across the industry. There is a report that there are $650 B unrealized losses across the industry.

Now, I want you to see this in context…

The below table shows, the average rates that WFC earns moved up from 2.28% to 3.16%, or 88 basis points of .88%, that resulted in $14.3 Billion higher interest income, yeap increasing rates mean banks earn higher interest income.

Now you will be asking what about the interest the bank incurs, sure they incur higher interest expense too, the average interest rate they pay moved up from .33% to .79% or .46%, but, but, but… that resulted in only $5.1 b higher interest expense, net the bank earned $9.2 b more or their NII increased!!!

Now, if you view the $50 B unrealized losses in this context, you can understand, how banks can easily withstand the unrealized losses, because they don’t have to book those losses, and either wait for the interest rates to go down or let the asset and liabilities mature and roll to higher rates.

Of course, currently the credit (i.e., the loans banks issued) are performing abnormally good, they will normalize (i.e., more loans, credit card will go bad) and higher credit costs will be incurred.

Net-Net banks can handle that too. What we are experiencing is not credit, or bank asset quality issues, but people are worried if the bank goes down their over $250K deposits are not safe. This is crisis of confidence and with digital banking, you can move billion before you can finish your coffee and peacefully work on your wordle fully knowing your money is safe and also you did your part in taking down yet another bank.

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Just a couple of points that stood out:

  • Look at the average interest rates on credit cards; Dear fellow Americans, don’t buy thinks you absolutely don’t need to survive and can’t afford on credit card; I know, I know, you are worried about if you go on shopping-strike economy will tank, but that’s ok, for a change instead of wall street cats and bankers, let us bring the economy down

  • WFC owns $55B auto loans; the interest earned on Auto & credit card (on $96 B loans) is almost equal to interest earned on $250 B residential mortgage loan

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