Wells Fargo Annual Letter

Here is the Wells Fargo 2008 annual Report to shareholders:
Wells Fargo Annual Report

Tom Brown had some interesting thoughts on it. Here are just a few:

Management is honest. Candid admission of error in CEO letters is rare, yet right up front, Stumpf concedes, “We made some mistakes but kept our credit discipline.” Nor does Stumpf sugarcoat his outlook for the future. “If you’re a pessimist, there’s a lot for you to like about 2009,” he writes. “It will be a rough year for our economy and our industry. Consumer loans will continue under stress, chargeoffs [uncollectible debt] probably will continue to rise.” Contrast that with what you’ll read in letters from banks that lost money in 2008 (which Wells Fargo did not.) You’d never guess they’re buried under problem loans! Wells Fargo is not in denial.

The company wants to build value, not an empire. In 2008, Wells Fargo doubled its assets with the acquisition of Wachovia. But in discussing the deal, Stumpf emphasizes that Wells didn’t do it simply to bulk up. “Size alone means nothing to us,” he writes. Then Stumpf repeats a mantra coined more than a decade ago by his predecessor, Dick Kovacevich: “You don’t get better by getting bigger, you get bigger by getting better”. Somebody please tell that to AIG, Bank of America, and Citigroup!

Management is truly focused on its teammates. In most shareholder letters, CEOs feel the need to buck up the rank and file with some gratuitous comment that “our employees are our greatest asset” or “our people are our greatest competitive strength.” They don’t mean a word of it, of course. Wells Fargo does. The company has long believed it can differentiate itself with superior employee performance; the record of the last 20 years shows that it can—and has. Stumpf writes, “we call them team members (an asset in which to invest), not employees (an expense to be managed).” At Wells, that investment has paid off. According to survey data gathered by Gallup, Wells Fargo’s community banking group has 8.7 team members who say they’re engaged in their work for each team member that’s actively disengaged. This compares with 2.5 engaged-to-disengaged team members five years ago, and a national average of 1.5 to 1. I believe the deep commitment of Wells’s employees is a key factor in the company’s long-term success.

For my money Wells Fargo’s Chairman Richard Kovacevich had the best line about the current crisis when he said last year, “I’ll never understand why bankers always seem to invent new ways to lose money when the old ones worked just fine”.

Let’s not forget Wells Fargo fought tooth and nail NOT to take TARP funds but was strong armed into it by then Treasury secretary Paulson. Now, those may say, “give it back”. I am sure Wells will repay it as soon as they can but, if the gov’t is giving all your competitors (JP Morgan (JPM), Citi (C), Bank of America (BAC))a financial boost, don’t you risk losing some competitive advantage by declining it in an uncertain market? I believe you do.

This is especially true when you consider Paulson made it clear to Kovacevich that should he decline it then and then need it later, it would a most unpleasant transaction for shareholders. In the end, Wells took the money.

Time to sit back now and watch to see how the Wachovia merger is digested. There is too much uncertainty out there politically (both good and bad)to make a concrete decision.