The looking at the financial ratios, one can
The Perfect Match: Wells Fargo vs. Bank of America The banking industry is highly competitive. The financial services industry has been around for hundreds of years. Wells Fargo has many competitors itself.
In this paper, I will be doing a comparison of Wells Fargo & Company (WFC) and one of its biggest competitors, Bank of America Corporation (BAC). By analyzing looking at the financial ratios, one can see whether the company is successful or not. In the following, I will try to analyze and make a comparison of Wells Fargo’s and Bank of America’s recent performance in growth, income, and efficiency.
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Using a these criteria, I will determine which bank is the better buy according my analysis. My analysis of WFC & BAC’s performances will include a discussion of… Background Information Before analyzing and comparing both banks, one needs to know a little about the banks themselves. We already learned a little bit about Wells Fargo from the first paper. Now let’s look at Bank of America Corp. BAC is one of Wells Fargo’s major nationwide competitors. BAC, the nation’s largest bank and financial holding company, has 6,238 offices within the U.
S. Bank of America had about 288,000 employees in its annual report for 2010.The CEO at Bank of America is Brian Moynihan. Analysis & Comparisons of WFC & BAC The following is a table showing an overview of Wells Fargo’s financial performance and percent change compared to Bank of America, for the years 2009 and 2010. Table 1: Financial Highlights of Wells Fargo & Bank of America | | | | *Year Ended December 31,| | | | | Wells Fargo (WFC)| Bank of America (BAC)| | *2009| *2010| % Change| *2009| *2010| % Change| Total Assets| $1. 24 trillion| $1.
26 trillion| 1%| $2. 23 trillion | $2. 26 trillion| 2%| Total Deposits | $824. 0 billion| $847. 9 billion| 3 | $991. billion | $1.
0 trillion| 1| Total Loans | $782. 8 billion| $757. 3 billion| (3)| $900. 1 billion | $940. 4 billion| 4 | Total Equity| $114. 4 billion| $127.
9 billion| 12 | $231. 4 billion | $228. 2 billion| (1)| Net Interest income| $46. 3 billion| $44. 8 billion| (3)| $48. 4 billion | $52. 7 billion| 9 | Operating Expense (non-interest expense)| $49.
0 billion| $50. 5 billion| 3 | $66. 7 billion | $83. 1 billion| 25 | Operating Income (non-interest income)| $42. 4 billion| $40. 5 billion| (5)| $72. 5 billion | $58.
7 billion| (19)| Pre-tax net income| $18. 0 billlion| $19. billion| 6 | $4. 4 billion | $(1. 3) billion| (130)| Net Income (loss)| $12. 3 billion| $12.
4 billion| 1 | $6. 3 billion | $(2. 2) billion | (135)| *Source: WFC & BAC 2010 10-K; moneycentral. msn. com| As shown in Table 1, at December 31, 2010, WFC’s total assets were $1.
3 trillion, an increase of $14. 5 billion, or 1%, from December 31, 2009. Shareholder’s equity had a $14. 62 billion increase.
This increase was probably due to the net income gains mentioned previously; nevertheless, the increase was partly offset as a result of a reduction in Securities Available for Sale.On the other hand, at December 31, 2010, BAC’s total assets were $2. 3 trillion, an increase of $34. 7 billion, or 2%, from December 31, 2009.
Therefore, it is clear that BAC has about $1. 0 trillion more in total assets than WFC. WFC has less total assets because the company only focuses its business operations on the domestic U. S. market.
WFC’s lack of international exposure contrasts with BAC. Although WFC holds assets overseas, it remains strongly focused on the U. S. domestic market. While this does allow Wells Fargo to focus its resources on gaining greater market share within the U. S. Wells Fargo is thereby more vulnerable to the U.
S. economic cycles, as it does not have foreign markets to buffer domestic performance. Year-end deposits of Bank of America increased $18.
8 billion to $1. 0 trillion in 2010 compared to 2009. The increase was attributable to growth in Bank of America’s noninterest-bearing deposits and money market account primarily driven by affluent, and commercial and corporate clients.
Wells Fargo’s deposits totaled $847. 9 billion at December 31, 2010, compared with $824. 0 billion at December 31, 2009. (p 53 on 10k) Year-end total loans of BAC increased $40. billion to $940. 4 billion in 2010 compared to 2009.
According to its 2010 annual report, the increase was primarily due to the impact of adopting new consolidation guidance partially offset by continued deleveraging by consumers, tighter underwriting and the elevated levels of liquidity of commercial clients. WFC total loans… BAC’s year-end total equity decreased $3. 2 billion (-1%) in 2010 compared to 2009. According BAC’s 2010 annual report, the decrease was primarily driven by goodwill impairment charges of $12. 4 billion and the impact of adopting new consolidation guidance as BAC recorded a $6.
billion charge to retained earnings for newly consolidated loans. WFC year-end total equity …. In 2010, BAC reported a net loss of $2. 2 billion compared to net income of $6. 3 billion in 2009. (pg 31) In comparison, WFC reported a profit increase for the full year of 2010.
WFC year-end net income was $12. 4 billion in 2010 compared to $12. 28 billion in 2009. This is a 1% increase. Wells Fargo attributed most of its increase in net income to revenue growth across many business sectors, improvement on asset quality, and the acquisition of Wachovia Corporation.
The increase in net income was also attributable to a reduction in provision for credit losses; the bank was able to lessen its loan loss reserves by $850 million. Bank of America’s net interest income increased $4. 3 billion to $52. 7 billion for 2010 compared to 2009. The increase was due to the impact of deposit pricing and the adoption of new consolidation guidance. BAC’s non-interest income decreased $13. 8 billion to $58.
7 billion in 2010 compared to $72. 5 billion in 2009. Contributing to the decline was lower mortgage banking income, down $6. 1 billion, largely due to $6.
billion in representations and warranties provision, and decreases in equity investment income, gains on sales of debt securities, trading account profits, service charges and insurance income compared to 2009. As with other industries, you want to know that a bank has costs under control, and that things are being run efficiently. According to the banking industry handbook from Investopedia. com Ideally, you want to see operating expenses remain the same as previous years or to decrease. This isn’t to say that an increase in operating expenses is a bad thing, as long as revenues are also increasing.
BAC’s non-interest expense (operating expense) increased $16. 4 billion to $83. 1 billion in 2010 compared to 2009. The increase was driven by $12. 4 billion of goodwill impairment charges recognized in 2010.
Pre-tax net income Comparison of Ratios Of all the fundamental ratios that investors look at, two of the most important are return on assets (ROA) ratio and the return on equity (ROE) ratio. ROA and ROE are two of the best measures of profitability. These two ratios remain an accurate measurement by which to measure industry performance. They both measure a company’s ability to generate earnings from its investments.Table 2: Profitability Ratios| | | | | Financial Sector Average| | | WFC| BAC| | | | | | | | ROA (%)| 1. 01%| -0.
15%| N/A| | ROE (%)| 10. 46| -1. 46| 8. 49| | *Source: values are taken from Yahoo! Finance.
| ROE is a basic test of how effectively a company’s management uses investors’ money. From Table 2, WFC has an ROE of 10. 46%.
This tells us that WFC generated 10. 46% profit on every dollar invested by shareholders. In comparison, BAC has a not-so-impressive ROE of -1.
46%. According to Yahoo Finance website, the ROE average for the financial sector is 8. 49%, meaning that WFC’s return of 10.
6% is more than two percentage points compared to the sector average. So, by this standard alone, WFC’s ability to generate returns from shareholders’ money appears rather good. The industry that WFC is listed under is money center bank.
The average for money center banks is 9. 30%; therefore, WFC’s ROE of 10. 46% is above the industry average of more than a percentage point. On the contrary, BAC has a negative return; therefore, it is not generating any profits from its stockholders’ money. Now, let’s look at ROA. A bank’s ROA is another good metric for evaluating anagement performance. ROA reveals how much profit a company earns for every dollar of its assets.
According to the banking industry handbook from Investopedia. com, it states that “banks are highly leveraged, so a 1% ROA indicates huge profits. ” From Table 2, Wells Fargo has an ROA of 1. 01%, which means it is making profits. Also, this indicates that WFC earned about 1% profit on the resources it owned. BAC did not earn any profit on the resources it owned since its return is -0. 15% (below 0%); this is well below the industry average of 1%.
Table 3: Efficiency Ratios| WFC| BAC| | 2009| 2010| 2009| 2010| Operating expense / assets| 3. 95%| 4. 01%| 3.
03%| 3. 61%| Net Interest income / assets| 3. 73| 3. 56| 2. 20| 2. 29| Non-interest income / assets| 3.
42| 3. 21| 3. 30| 2. 55| *Source: values are taken from my own calculations| | Managers can use the above ratios to help manage their expenses. Looking at Table 3, the operating expense ratio (operating expenses divided by total assets) for WFC increased from 3.
95% in 2009 to 4. 01% in 2010 (a 0. 06% increase). The operating expense to total assets ratio for BAC increased 0. 8% to 3.
61% in 2010. Managers preferably would like to see operating expenses remain the same as previous years or to decrease. A key contributing factor to the rise in WFC and BAC operating expenses is operating expense growth outpacing asset growth. As shown in Table 1, total assets for WFC grew at a rate of only 1% between 2009 and 2010, while operating expenses grew at a rate of 3% over the same period.
As for BAC, its operating expenses grew at a whopping rate of 25% between 2009 and 2010, while total assets grew at a rate of only 2% over the same period.Both WFC and BAC’s operating expenses were greater than their total assets between 2009 and 2010. However, WFC was better off compared to BAC because BAC operating expenses’ growth rate of 25% (between 2009 ; 2010) was much higher than WFC’s rate of only 3%. To achieve a lower expense ratio, both banks will need to lower their operating expenses and raise their total assets. Looking at Table 3, the ratio of the net interest income to total assets for WFC decreased from 3. 73% in 2009 to 3.
56% in 2010 (a 0. 17% decrease). BAC ratio increased from 2. 0% in 2009 to 2. 29% in 2010 (only a 0.
09% increase). Net int income: subtracting the amount of interest paid on liabilities from the amount of interest earned from assets. The non-interest income to total assets ratio indicates the ability of the bank’s assets to generate non-interest income (operating income). Going back to Table 3, the ratio of the non-interest income to total assets for WFC decreased from 3. 42% in 2009 to 3.
21% in 2010 (a 0. 21% decrease). BAC ratio decreased from 3. 30% in 2009 to 2.
55% in 2010 (a 0. 75% decrease).The decreased in WFC and BAC ratios was probably due to total assets being greater than non-interest income; operating expense growth outpace asset growth. As shown in Table 1, total assets for WFC grew at a rate of only 1% between 2009 and 2010, while operating expenses grew at a rate of 3% over the same period. As for BAC, its operating expenses grew at a whopping rate of 25% between 2009 and 2010, while total assets grew at a rate of only 2% over the same period.
income derived primarily from fees operating income Loan losses for WFC ; BACLoan losses… The financial sector is hurting from all the bad loans it has written over the last decade. Now the sector is paying the price in the form of higher loan loss reserves… *at year end| Table 4: Overview of Loan Losses| | Wells Fargo (WFC)| Bank of America (BAC)| | *2009| *2010| Difference| *2009| *2010| Difference| Provision for Loan Losses (PLL) | $21. 7 billion| $15. 8 billion| ($5. 9) billion| $48.
6 billion | $28. 4 billion| ($20. 2) billion| Allowance for Loan Losses (ALL)| $24.
5 billion| $23. 0 billion| ($1. 5) billion| $37. 2 billion | $41. 9 billion| $4. 7 billion| *Source: WFC ; BAC 2010 annual report.
As shown in Table 3, provision for loan losses (PLL) for WFC decreased $5. 9 billion to $15. 8 billion in 2010 compared to 2009.
BAC’s PLL decreased $20. 2 billion to $28. 4 billion in 2010 compared to 2009. The PLL was $5. 9 billion lower than net charge-offs in 2010, resulting in a reduction in reserves, compared with the 2009 provision for credit losses that was $14. 9 billion higher than net charge-offs, reflecting reserve additions throughout the year. The reserve reduction in 2010 was due to improving portfolio trends across most of the consumer and commercial businesses, particularly the U.
S. redit card, consumer lending and small business products. (p32;34 on 10k) BAC’s year-end allowance for loan losses (ALL) increased $4. 7 billion in 2010 compared to 2009 primarily due to the $10.
8 billion of reserves recorded on January 1, 2010 in connection with the adoption of new consolidation guidance. This was partially offset by reserve reductions during 2010 due to the impacts of the improving economy. WFC’s year-end allowance for loan losses (ALL) My Recommendation (The winner of the matchup is…) In summary, I have compared and analyzed Wells Fargo and Bank of America’s financial performance, loan losses, and key ratios.Wells Fargo remains in good financial position because of its continued improvement of net income; in addition to its above-industry-average ROA ratio and ROE ratio. On the contrary, Bank of America had a net loss of … Wells Fargo has decreased credit losses and sustained sufficient levels of assets. Although the slowing mortgage business is an issue of concern for investors, Wells Fargo will be a good candidate to prosper further as the economic recovery takes firm hold. I think WFC is performing better for its shareholders/owners. My reasons: …. these basic numbers suggest that Wells Fargo is a better buy.My intent is to measure The criteria. I based my decision on … In the midst of the recent market turmoil, banks in particular have been hit hard. However, there are some banks that have held strong to their success and Wells Fargo and Co. has stood out as one bank that can weather the storm Wells Fargo is a better bank because it is more conservative and consistent with its operation. Therefore the business has better predictability, and can weather the current turmoil market, and even benefit from it over long term. Works Cited Bank of America’s 2010 annual report ttp://media. corporate-ir. net/media_files/irol/71/71595/reports/2010_AR. pdf “Wells Fargo ; Company Annual Report 2010. ” Wellsfargo. Wells Fargo, 2011. Web / Print. 15 Mar. 2011 https://www. wellsfargo. com/downloads/pdf/invest_relations/wf2010annnualreport. pdf http://www. investopedia. com/features/industryhandbook/banking. asp http://financialcontrols. blogspot. com/2011/01/well-fargo-reports-improved-earnings-in. html http://investor. bankofamerica. com/phoenix. zhtml? c=71595;p=irol-reportsannual http://biz. yahoo. com/p/4conameu. html (yahoo financial sector)