Sunday, June 17, 2007

A Comparison of Two Banks

I am going to show you some statistics for two different banks to demonstrate the importance of the criteria I have been talking about recently. The first is Wells Fargo, WFC. In a recent interview, Charlie Munger talked about "this company in an emerging market that was presented to Warren. His [Warren's] response was, 'I don't feel more comfortable buying that than I do of adding to Wells Fargo.' He was using that as his opportunity cost." What does Warren like so much about Wells Fargo?

89 billion checking deposits
134 billion cheap savings deposits (2.4%)
310 billion total deposits

20.7 billion non-interest expense
15.7 billion non-interest income
35 billion total revenue

1.12% nonaccrual loans (90+ days without payment) to total loans
1.24% allowance for loan losses

What makes Wells Fargo particularly phenomenal is that they earn so much of their revenue from non-interest income- mostly from asset management, credit cards, and insurance. These businesses have shown great growth and consistency. Meanwhile, the company still has a very solid deposit base, with 29% of deposits interest free and the rest very cheap. Finally, their asset quality is good and their allowance for loan losses is acceptable(not great).

The second company is Corus Bankshares, CORS. The numbers are much less exciting.

280 million checking deposits
8.3 billion high interest deposits (5.01%)

66 million non-interest expense
19 million non-interest income
760 million revenue

5.09% nonperforming loans to total loans
1.3% allowance for loan losses

Everything about Corus stands out as bad. They have a terrible deposit base with a very high cost. Non-interest income is an inconsequential part of total revenue. And their allowance for loan losses seems terribly weak.

There are a couple of important things to take from this demonstration. First is that Wells Fargo is much more than just a bank, and maybe conventional valuation will understate its many positive qualitative factors. Second, it appears Corus is in trouble. In a business where equity to assets is usually near 10%, any weakness in loan allowances can quickly wipe away equity, and at this point that scenario seems plausible. Finally, this exercise threw up a red flag for one of my own holdings, Delta Financial. Delta had 5.1% of their loans nonperforming last quarter, compared to an allowance of only .88%. Although most of these loans are securitized and have no recourse to Delta, the company can still be hit very hard by a large increase in defaults. Something to look into...


Reza said...

Keep up the good work.

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Loan Comparison