Banking 101
It’s easy to forget what makes most banks tick after the issues of the last several years. There was an old adage about bankers, that they lived on threes and sixes. The traditional banker was thought to pay 3% on deposits, lend money at 6%, and play golf at 3 PM.
Today the core of banking is still deposit gathering and lending. However, there are many complications to the business like fair lending rules, financial oversight, fee regulations, and more. That being said, deposits and loans are still an important measure of a bank’s health, and by these measures, Wells Fargo & Co (NYSE:WFC) has some issues.
It’s not always deposit growth, but what types of deposit are growing
In banking, there is one simple rule, checking accounts are more important than any other type of account. The reason is simple, generally speaking checking accounts are non-interest bearing, and this is the cheapest source of funds. Since the bank also collects fee income from these accounts, they are highly profitable.
The problem at Wells Fargo & Co (NYSE:WFC) is, the company’s deposit growth isn’t mainly coming from checking accounts. On the surface, the company’s total deposit growth of 6.36% looks good. By comparison, BB&T Corporation (NYSE:BBT) reported 4.7% deposit growth, JPMorgan Chase & Co. (NYSE:JPM) reported deposits up 7%, and Bank of America Corp (NYSE:BAC) saw deposits climb 4.38%.
However, once you get past the overall numbers, there is a difference in how these companies grew. Of BB&T Corporation (NYSE:BBT)’s total deposits, about 37.13% come from money markets and savings, versus 39% at Bank of America. JPMorgan Chase & Co. (NYSE:JPM) reported a higher percentage, with 51.87% of their total deposits coming from money market and savings accounts. However, Wells Fargo & Co (NYSE:WFC) beat them all with 54.51% of their total deposits from money market and savings accounts.
The problem is, Wells Fargo is growing their deposits, but this growth is coming from more expensive sources. It’s fine when interest rates are low to see good growth in money markets and savings, but longer-term, you want to see the biggest growth in checking accounts.
If this is a quality institution, you wouldn’t know it by looking at their loans
If Wells Fargo & Co (NYSE:WFC) is a quality institution, you wouldn’t know it looking at the company’s credit quality. While it’s true that Bank of America Corp (NYSE:BAC) has a worse percentage of non-performing loans at 2.53%, Wells Fargo isn’t far behind at 2.44%. The difference between the two is, Bank of America saw their non-performers drop by 17.8% on a year-over-year basis, whereas Wells Fargo & Co (NYSE:WFC) reported a decline of 7.21%.
Looking at JPMorgan and BB&T, their non-performers are already much lower than Wells Fargo. In fact, JPMorgan Chase & Co. (NYSE:JPM)’s non-performers stand at 1.6% of their portfolio, and BB&T Corporation (NYSE:BBT) reported a ratio of just 1.12%. As you can see, Wells Fargo seems to have a problem with their credit quality.
