Wells Fargo 1q09 results

Overview
Wells Fargo is a diversified financial setvices company with $1.3 trillion in assets (the 4th largest in U.S.) providing banking, insurance, investments, mortgage and consumer finance through more than 10,400 stores, over 12,000 ATMs and internet across North America and internationally.
It has the highest net interest margin among peers (4.16% vs 3.00% in average), it is also the 2nd highest holding in Berkshire Hathaway's equity investment portfolio.

1q09 results (vs 4q08)
1. Revenue (before provision) up 121.8% vs 4q08 to $21.0B

• Revenue increase mainly due to the acquisition of Wachovia in 12/31/08;
• Net interest income (before provision) up 69.2% to $11.4B with the continue improve in interest spread (interest income up 64% while interest expense only up 46.6%)
• Net interest margin down from 4.90% to 4.16%. It drop mainly due to the acquisition of Wachovia (a bank with 3.0% a lower interest margin), but as I mentioned in the bullet (the one above), the interest spread is actually improving if the 4q08 data included the legacy Wachovia and I think it will continue to improve;
• Non-interest income to total revenue (before provision) ratio improve from 29.0% to 45.9%, back to the normal. The 235.1% improve in trust & invest fees income are mainly contributed by Wachovia;
• Efficiency ratio improved from 61.3% to 56.2%, back to normal.

2. Reported EPS up from -$0.84 in 4q08 to +$0.56

• Provision down 46% to $4.6B, thanks to the balance sheet write off done in 4q08 on Wachovia's book, I expect the future provision will not rise back to 4q08's level (given the economy data so far);
• Allowance for credit losses up 20 bps to 2.71% from 2.51% or up 115 bps vs 1q08;
• WFC said start in 2q09, it will save $5B expenses per year due to the merge;
• Commission & incentive expenses up significantly by 171.8% to $1.8B, it may be due to the increase in trust & invest fee's increase. If it is mainly due to bonus paid out, I think it is just too high (have to see how's the trend in 2q & 3q);
• Expenses on core deposit and FDIC also up significantly by 1,276.6% & 528.1%. It tells how expensive it is to keep "excess capital" & to keep a so call "reasonable" capital level, but it is not the way to create wealth and increase earning. It is just a method to keep investors & depositors less worry;
• Return of equity up to 14.49% from -22.32% and consistent with trend

3. Balance sheet

• Total equity up 4.6% to $107.1B a) AOCI net loss down by 47.2% to -$3.6B; b) Common stock & retained earning down 4% mainly due to the $0.34 per share dividend (will cut in 2Q);
• Book value per share up 0.8% to $16.28;
• Total equity to assets ratio up 21 bps to 5.40%;
• Tangible common equity ratio up 42 bps to 3.28%
• Tier 1 capital ratio up 44 bps to 8.28%, lower than its peers but able to pass the federal capital stress test while CitiGroup & Bank of America failed with a higher cpaital ratio. That means WFC's asset quality is better than those big 2;
• On asset side, Although WFC said it has significant credit extended to U.S. taxpayers with $175B loan commitments, $190B mortgage application and $101B mortgage originations, but its loans balance down 2.5% to $844B even thought mortgage balance up 83.2% to $36.8B
• On liabilities side, non-interest bearing deposits up 10.4% and short term borrowing down 33.3, it shows a trend that WFC continue to take the advantage of the financial crisis and recession to increase deposit base (borrow cheaply) and lower ST borrowing (stablize its cash position & funding)

Risk

• Weak economy: if house price continue to fall, unemployment continue to rise, it will trigger the delinquency rate to rise;
• May take a very long time to derive the merge benefit;
• Concerns on WFC's $93.2B pick-a-pay mortgage and Wachovia's $45.3B commercial real estate division
• Business mainly in U.S., which may limit its future growth as lots of its peers turn themselves into a global financial giant.

Bilibala with Wells Fargo

• Wells Fargo has 47 stores in Ontario Canada, and 1 of them is in North Bay. There is another one along Kennedy and Sheppard. I should find sometime to visit or open an account there;

Comments
Buy, fair value $40.70.
Wells Fargo is the well managed and conservative financial institution, it claimed that it always "open for business" who will lent $$ at any time but only to credit worth companies and individuals.

News: USA's 1q09 Economy

Economy in U.S. Shrank at 6.1% Rate in First Quarter
By Bob Willis

April 29 (Bloomberg) -- The U.S. economy plunged again in the first quarter, capping its worst performance in five decades, reflecting a record slump in inventories and further declines in housing.

Gross domestic product dropped at a 6.1 percent annual pace, more than forecast, after contracting at a 6.3 percent rate in the last three months of 2008, the Commerce Department said today in Washington. The report, which marked the weakest six months since 1957-58, comes as Federal Reserve policy makers meet for a second day.

Smaller stockpiles may set the stage for a return to growth in the second half of the year amid signs Fed efforts to reduce borrowing costs and unclog lending are starting to pay off. The recession persisted even as lower gasoline prices and larger tax refunds helped bring an end to the worst slump in consumer spending in almost three decades.

“This is one of those good-bad numbers,” Joel Naroff, president of Naroff Economic Advisors Inc. in Holland, Pennsylvania, said in a Bloomberg Television interview. “Businesses are running about as lean as they possibly can be. It sets up the reality that any sort of increase in demand will cause firms to have to increase production.”

As a result, Naroff predicted growth won’t “be nearly as bad in the current quarter, and will probably be reasonably good.”

Stock-Index Futures
Stock-index futures were higher, with futures on the Standard & Poor’s 500 Index up 1.1 percent at 860.9 as of 8:50 a.m. in New York. Treasuries were little changed, with benchmark 10-year notes yielding 3 percent.

The median forecast of 71 economists surveyed by Bloomberg News projected GDP, the sum of all goods and services produced, would shrink at a 4.7 percent pace. Estimates ranged from declines of 2.8 percent to 8 percent.

The world’s largest economy shrank 2.6 percent in the first quarter compared with the same period a year earlier. Today’s advance report on GDP is the first of three estimates on first- quarter growth.

Consumer spending, which accounts for about 70 percent of the economy, climbed at a 2.2 percent annual pace last quarter, the most in two years. Purchases dropped at an average 4.1 percent rate in the last half of 2008, the biggest slide since 1980.

Stockpiles Plunge
Companies trimmed stockpiles at a $103.7 billion annual rate last quarter, the biggest drop since records began in 1947. Excluding the reduction, the economy would have contracted at a 3.4 percent pace.

“This is the combination you want for a turn in the economy -- better sales and an inventory correction,” John Silvia, chief economist at Wachovia Corp. in Charlotte, North Carolina, said before the report.

Companies cut total spending, including equipment, software and construction projects, at a record 38 percent annual pace.

Residential construction also decreased at a 38 percent pace last quarter, the most since 1980.
One reason for the larger-than-projected decline in GDP was that government slashed spending at a 3.9 percent pace, the most since 1995. The drop reflected cutbacks in defense spending and the biggest decrease in state and local government outlays since 1981.

Trade Gap
A smaller trade gap added 2 percentage points to growth last quarter. The deficit shrank as imports collapsed at a 34 percent annual pace, the most since 1975, which reflected the reduction in stockpiles.

Should the economy shrink again in the second quarter as projected by economists surveyed this month by Bloomberg, the recession that began in December 2007 would be the longest since the Great Depression.

Recent announcements by companies including General Motors Corp. indicate that will be the case. GM last week said it will idle 13 U.S. assembly plants for multiple weeks to trim production by 190,000 vehicles from May through July. Sales in its home market fell 49 percent this year through March.

General Motors and Chrysler LLC are threatened with bankruptcy as sales have plummeted since credit markets seized last year.

Still, data in recent weeks, including signs of stability in home sales, residential construction and consumer confidence, signal the world’s largest economy may shrink at a slower pace.

Fed Purchases
Part of the improvement may be due to government efforts to stem the recession. In its last meeting on March 18, the Fed pledged to double mortgage-debt purchases to $1.45 trillion and buy as much as $300 billion in long-term Treasuries. That’s helped bring down rates on mortgages and auto loans.

The central bank’s statement today, due at around 2:15 p.m., may acknowledge that the pace of economic decline has moderated in the past six weeks and may reiterate it will keep the benchmark rate low for an extended period and continue to boost its balance sheet to revive lending.

The Fed’s preferred measure of inflation, which tracks consumer spending and excludes food and fuel costs, rose at a 1.5 percent annual pace last quarter, toward the lower end of central bankers’ longer-term forecasts.

Ford Motor Co., working to avoid a federal bailout, is among companies seeing some improvement. The automaker last week posted a first-quarter loss that beat analysts’ estimates.
“We’re not quite sure where the bottom is,” Ford’s Chief Executive Officer Alan Mulally said in an April 24 Bloomberg Television interview. “But we believe with the stabilization of the banks, freeing up the credit, and the stimulus packages we have, both monetary and fiscal, that we’re going to see an uptick in the third and fourth quarter.”

Bilibala's comments:
6.1% is in line with my expectation, I think we should see the GDP to have lesser decline in Q3 and may see positive "recover" by Q4.

An interview with billionaire Warren Buffett on Succession

Interview with Bill Gate

Another one on interview with Warren Buffet

http://www.gurufocus.com/news.php?id=53784

News: Berkshire Hathaway

April 28 (Bloomberg) -- Microsoft Corp. co-founder Bill Gates, recruited by his friend Warren Buffett to join the board at Berkshire Hathaway Inc., said he’s committed to the firm for the rest of his life.

Gates and fellow Berkshire board member Don Keough, the former president of Coca-Cola Co., said in separate interviews with Bloomberg Television that their role with Omaha, Nebraska- based Berkshire is to protect the company’s culture and values after Buffett, 78, steps down. Buffett has pledged the majority of his Berkshire shares to Gates’s charitable foundation.

“I’ve got a commitment to stay involved with Berkshire as a lifelong thing,” Gates, 53, said in an interview scheduled to be broadcast today. “We always have to think about what might happen and make sure Berkshire is not just great now, but forever.”

Buffett, Berkshire’s chairman and chief executive officer, has said the board’s most important job will be to replace him when he’s unable to perform his duties. He will host about 35,000 people on May 2 at Omaha’s Qwest Center arena for the annual shareholder meeting -- an occasion where he typically fields questions about the succession plan.

“It’s the most important issue there is,” Buffett said in an interview with Bloomberg Television at Berkshire’s headquarters last month. “There’s nothing more important. Nobody knows on any given day where I’ll be the next day.”

‘Intense and Real’
Buffett built Berkshire over four decades from a failing manufacturer of men’s suit linings into a $140 billion company by investing in out-of-favor stocks and buying dozens of businesses ranging from insurance and underwear to ice cream and utilities. Buffett says his ideal time horizon to hold a stock is “forever,” and he purchases operating companies for Berkshire with the promise to their owners never to sell them.

“When you’re sitting on the board, you’re talking about sustainability of Berkshire Hathaway long-term, the issue of management down the road,” said Keough, 82. “The culture he’s built into Berkshire is intense and real and, I think, permanent.” Berkshire is the largest shareholder in Coca-Cola, and Buffett served on the soft-drink maker’s board with Keough.

Buffett said in letters to shareholders and at past annual meetings that the chairman post will go to his son, Howard Buffett, to keep the culture intact, and said the remainder of his work will be split between at least two people: a CEO and person or group that handles investing.

‘Total Confidence’
“All candidates currently work for or are available to Berkshire and are people in whom I have total confidence,” he said in the company’s most recent annual report. Buffett said in an interview March 5 that the CEO candidates hadn’t changed in a year. He declined to name them.
“You could water-board me,” and he still wouldn’t tell, Buffett joked.

Berkshire stockholders and Buffett-watchers have long speculated about who will fill the CEO position. Barron’s has reported that David Sokol, the head of Berkshire’s MidAmerican Energy Holdings Co., was the most likely successor. Sokol said in an interview with Bloomberg Television he hasn’t discussed succession with Buffett.

“Never a word,” Sokol said. “Unfortunately my name comes up because people try to come up with names.”

Tony Nicely, the head of Berkshire’s Geico Corp. car insurance business, and Ajit Jain, who runs a unit that sells reinsurance, are also on media lists of potential successors. Buffett biographer Alice Schroeder, now a Bloomberg News columnist, has suggested Buffett adviser Byron Trott, formerly at Goldman Sachs Group Inc., is an ideal candidate.

Charitable Foundation
Gates’s commitment to Berkshire mirrors Buffett’s pledge to the Bill & Melinda Gates Foundation, a charity established by Gates and his wife to fight disease and global poverty. Buffett in 2006 promised to give the majority of his Berkshire shares to the foundation, in 5 percent annual increments, as long as Gates or his wife is still alive and managing the foundation.
His grant, valued at about $31 billion at the time it was made, also stipulates that the stock payments may be accelerated in the event of Buffett’s death.

Forbes magazine in March ranked Gates as the richest person in the world, and listed Buffett as second. The two men have known each other since 1991, according to Schroeder’s book, when they met at a party outside Seattle celebrating July 4, the U.S. Independence Day.

“As soon as I sat down with him, he was asking me, ‘Why didn’t IBM do this,’ and ‘why wasn’t Microsoft doing that’, and he was asking the questions that I’ve always waited for somebody to ask,” Gates said in the interview. “We just got into this conversation where the whole day went by.”

Gates owns 300 Berkshire shares personally and another 4,050 through his Cascade Investment LLC according to a regulatory filing last month. The stake was valued at more than $390 million based on yesterday’s closing price of $90,000 a share.

(Portions of the interviews with Buffett, Gates, Keough, Trott and Sokol will be broadcast today starting at 5 p.m. New York time, as part of a special about Berkshire Hathaway airing on Bloomberg Television and at BTV on the Bloomberg terminal.)

To contact the reporter on this story: Erik Holm in New York at eholm2@bloomberg.net; Betty Liu in New York at bliu17@bloomberg.net. Last Updated: April 28, 2009 09:05 EDT

News: Target funds miss the mark

Portfolio managers who committed too much money to stocks in search of extra gains inflicted big losses on investors nearing retirement.
By Mina Kimes, reporter
April 27, 2009: 1:40 PM ET

(Fortune Magazine) -- Target-date funds, also called life-cycle funds, are supposed to ease your troubles. You park your money in one, and the fund manager rebalances your portfolio over time, moving your assets from stocks to bonds as you approach your retirement. But for many target-date investors in their sixties, those years will now be spent trying to recuperate losses of 25% or more in 2008 - which were incurred in part because their funds were treating them like 30-year-olds.

"The typical target-date fund is overly aggressive," says Craig Israelsen, a Brigham Young University professor and the founder of research firm Target Date Analytics. "Managers were betting that if they were in equities, they'd perform better - and they got nailed, along with everyone else. The problem is, they were nailing people in their sixties and seventies."

According to Israelsen, the average 2010 fund - marketed to investors who were aiming to retire next year - was more than 45% invested in stocks in December. As of March 2008, the mammoth Fidelity Freedom 2010 Fund (FFFCX) housed 50% of its assets in equities, and AllianceBernstein's 2010 portfolio (LTDAX) was 57% in stocks in February of last year. The funds lost 25% and 33%, respectively, last year, barely beating the S&P 500.

That dismal performance has drawn notice in Washington. Wisconsin Senator Herb Kohl, who heads the Senate special committee on aging, asked the SEC and the Department of Labor in February to investigate target-date funds. (Secretary of Labor Hilda Solis agreed on March 26 to begin a probe.)

"These emerging products have the potential to help millions of Americans, particularly those with low financial literacy, save for their retirement," wrote Kohl in a letter to Solis. "But in order for such funds to be successful, there must be effective oversight."

Why would a senator take an active interest in a class of mutual funds? For one thing, Washington helped make target-date funds popular with the Pension Protection Act of 2006, which allowed employers to make them the "default option" in their 401(k) plans - the investment for participants who do not specify other choices. Partly as a result, target-date funds have proliferated. Morningstar analyst Greg Carlson says that of the 380 target-date funds, more than 300 are less than five years old. "Despite what happened in 2008, I don't see their popularity waning," he says. "Investors are attracted to low maintenance."

Many money managers say that the fund class's weak performance last year was caused by poor execution, not the underlying concept. "The idea still has a lot of promise," says Kevin Price, chief investment officer at Interlake Capital Management. But Price notes that funds are usually marketed on performance, which may have led managers to take added risk in search of extra return. "These products were built to be sold," he says, "which is one of the reasons they were overexposed to equities."

In response to allegations that they took too many risks, fund managers argue that retirees are likely to live for another 20 or 25 years after they stop working - which is why it's better to hit the target date with a big equity stake. But Ronald Sweet, manager of USAA's target date funds, says fund managers should have been prepared for older investors to withdraw their money in the case of a slowdown. "We never bought the argument that people nearing retirement should have much in stocks," says Sweet.

Another defense that's cropping up: 2008 was a once-in-a-lifetime event that left no asset unscathed, save Treasuries. "Clearly we're disappointed that we saw the results we did," says Mike Finnegan, one of the managers of the Principal Lifetime 2010 fund, which lost 31% of its value last year. "But just about everything struggled. And if you weren't invested in the life-cycle funds, where else would you have invested?"

Bonds did fall last year, although funds with more of them were better off. Wells Fargo's Advantage Dow Jones Target 2010 (STNRX), which had 61% of its assets in bonds last February, lost 11% in 2008, beating the group average. Another fund that played it safe was Deutsche Bank's DWS Target 2010 (KRFAX), which had 79% of its holdings in government and agency debt last July and dropped just 4% last year.

The lesson here is that even with investments that are meant to put you on autopilot, you have to be alert. When choosing a target-date fund, make sure the asset allocation fits your own idea of what's sensible for someone your age.

And keep an eye on expenses - as a rule, says Carlson, seek out low-cost target-date funds like Vanguard's Target series (WTWNX), where expense ratios are, per the house style, around 0.2%. Vanguard's costs are low because it puts most of its target-rate assets in index funds, which passively track stocks.

Interlake's Price says he "overwhelmingly prefers funds invested in indexes," and not just because they're cheaper. "Too often these funds are stuffed full of expensive, proprietary funds," he says. "With indexes, you know exactly what you're getting."

Bilibala's comments:
Lots of target fund has the benefit feature to guarantee the principle, even if the stock market go down, the policyholders should be protected. However, target fund keep selling a portion of equity and buy bonds over time. If the equity market fall now when the target fund sell the equity and rise back in future when the target fund sell more equity, which means target fund will never 100% capital loss even if the equity market rebound (because the target fund has already sold a portion of the equity out).

Therefore, target fund will only work the best if the equity market fluturate smoothly in long run, otherwise, it is just like deposit $$ for 10-25 years with no interest. If so, who cares about the guarantee? Why do I have to invest into it?

Econ data: 09 week 17

This week, 1/3 of S&P 500 companies published their 1q results. Most of them looks better than analysts expectation, which send the market go higher on the 8th consisent week.
Ford posted net loss but having better than expected cash flow, which is ecouraging.

Also, China Life's 1q results is 55% better than 1q08, will prepare the analysis later.

Economic Data

House market

• US Mar new home sales at 356k same as 358k in Feb (better than expect 337k)
• US Mar existing home sales down to 4.57M from 4.71M in Feb (worse, 4.65M)

Retail market

• US Mar Durable orders down -0.8% from up +2.1% in Feb (better, -1.5%)

Job market

• US 04/18 initial jobless claims up to 640k from 613k last week (same, 640k)

Others

• Canada lower its interest rate by another 25 bps to 0.25%, the lowest in history

Warren Buffett on Wells Fargo

'Banking is a very good business unless you do dumb things,' says Wells Fargo's largest shareholder.

Interview by Adam Lashinsky
Last Updated: April 20, 2009: 11:40 AM ET

SAN FRANCISCO (Fortune) -- As the largest shareholder of Wells Fargo through Berkshire Hathaway (BRKB), Warren Buffett knows the San Francisco bank deeply. He first invested before Wells Fargo was bought by Norwest, where current Wells Chairman Dick Kovacevich was CEO. As part of his reporting for his feature on Wells Fargo (WFC, Fortune 500), Fortune Editor at Large Adam Lashinsky spoke at length with Buffett by telephone on March 26.

Fortune: How is Wells Fargo unique?
Warren Buffett: It's sort of hard to imagine a business that large being unique. You'd think they'd need to be like any other bank by the time they got to that size. Those guys have gone their own way. That doesn't mean that everything they've done has been right. But they've never felt compelled to do anything because other banks were doing it, and that's how banks get in trouble, when they say, "Everybody else is doing it, why shouldn't I?"

Bilibala => it is hard to not doing when everyone is doing it.

What about all the smart analysts who think no big bank can survive in its present form, including Wells Fargo?
Almost 20 years ago they were saying the same thing. In the end banking is a very good business unless you do dumb things. You get your money extraordinarily cheap and you don't have to do dumb things. But periodically banks do it, and they do it as a flock, like international loans in the 80s. You don't have to be a rocket scientist when your raw material cost is less than 1-1/2%. So I know that you can have a model that works fine and Wells has come closer to doing that right than any other big bank by some margin. They get their money cheaper than anybody else. We're the low-cost producer at Geico in auto insurance among big companies. And when you're the low-cost producer - whether it's copper, or in banking - it's huge.

Then on top of that, they're smart on the asset size. They stayed out of most of the big trouble areas. Now, even if you're getting 20% down payments on houses, if the other guy did enough dumb things, the house prices can fall to where you get hurt some. But they were not out there doing option ARMs and all these crazy things. They're going to have plenty of credit losses. But they will have, after a couple of quarters of getting Wachovia the way want it, $40 billion of pre-provision income.

And they do not have all kinds of time bombs around. Wells will lose some money. There's no question about that. And they'll lose more than the normal amount of money. Now, if they were getting their money at a percentage point higher, that would be $10 billion of difference there. But they've got the secret to both growth, low-cost deposits and a lot of ancillary income coming in from their customer base.

Bilibala => most of analysts are accurate in short term, especially the one concern about risk management. You can't tell people it is not risky at all "if" you look at things in long term.
But for investors, if you look for long term, those analysts works are irrelevant to you.

Insurance revenues for example, which had double-digit revenue growth in 2008.

And I would say that most of the critics of Wells don't even know they've got that business. That business alone is worth many billions of dollars. And their mortgage business, as you can imagine in this period, I mean, the volume that is poring through there, is huge. The critics have been right on other big banks, so I think they're inclined to sweep Wells in as well to some extent. And if you've been right on Citi and you've been right on BofA, it gets easy to say, well, they're all going to go.

We own stock in four banks: USB, Wells, M&T, and SunTrust. SunTrust I don't know about because South Florida is going to be the last to come back, and they've got a concentration down there. The other three, they're going to have a lousy year, but they'll come out of it with far more earnings power. The deposits are flowing in. The spreads are wide. It's a helluva good business.

Bilibala => among the four, I only have Wells Fargo. Mainly because of Warren Buffet, and also because it has the highest interest margin, an interest margin away higher than peers.

Dick Kovacevich specifically told me to ask you your views on tangible common equity.

What I pay attention to is earning power. Coca-Cola has no tangible common equity. But they've got huge earning power. And Wells ... you can't take away Wells' customer base. It grows quarter by quarter. And what you make money off of is customers. And you make money on customers by having a helluva spread on assets and not doing anything really dumb. And that's what they do.

Incidentally, they won't lend Berkshire money. They're not interested in national credits or any of that stuff where the spreads are narrow. We did a big deal about six or seven years ago on Finova, which we did jointly with Leucadia. And what was then the old First National of Boston sort of headed the deal up, and people would come in for $500 million or $200 million. Wells wasn't interested. There wasn't enough money in it, basically. I got a big kick out of that because that was exactly how they should think. Everybody else wanted to be in it, and they were doing it for 20 basis points or something of the sort. And they'd make commitments for all kinds of credit for 6 or 8 basis points, and the ones that were in the underwriting business, they would do it just get the underwriting.

Bilibala => don't waste time to do things without reasonable reward, earthly or heavenly, I guess that also whole ture.

But back to tangible common equity...
You don't make money on tangible common equity. You make money on the funds that people give you and the difference between the cost of those funds and what you lend them out on. And that's where people get all mixed up incidentally on things like the TARP. They say, 'Well, where'd the 5 billion go or where'd the 10 billion go that was put in?' That isn't what you make money on. You make money on that deposit base of $800 billion that they've got now. And that deposit base I guarantee you will cost Wells a lot less than it cost Wachovia. And they'll put out the money differently.

They'll have to work through a lot of this stuff that they inherited from Wachovia. Those option ARMs, they explained exactly how they break them down, and in the end they may lose 3 or 4 billion more. Nobody knows exactly. But I would say that California residential real estate is not deteriorating. It hasn't moved up. But it has flattened out with good volume recently. So my guess is that the option ARMs will work out about as they guessed.

Bilibala => tangible common equity / tangible assets (as well as the total assets / total common shareholders' equity) becomes a popular ratio for risk management. Analysts use them to judge whether a bank has sufficient money to cover its assets in case if any write down in near future. It is conservative, and in most of the time, if someone based on these 2 ratios and ignore the rest, it will be over-conservative and over emphasis on risk.

What if the Treasury imposes new capital requirements? Will it hamper their earnings power?
I don't think it'll hamper their earnings. But if you make them sell a lot of common equity it would kill the common shareholder. It wouldn't increase the earning power in the future, and it would increase the shares outstanding. Wells, if they want another $10 billion in common equity or something like that in Wells, they'll have it in a very short period of time at this dividend rate. [In March, Wells cut its dividend by 85%.] Wells will be piling up the equity while they're paying nominal dividends. They could afford to pay the old dividend. But since they won't be paying the old dividend, that's $4 billion a year or something that they'll be adding to equity.

I would have been fine if they had just said, 'Look it, we'll quit paying any common dividend until our equity has gone up by whatever it might be, 10 or 15 billion.' And they'd get there in no time. Then they could pay the regular dividend. They elected to do it this other way because everybody seems to be kind of doing it. The idea of forgoing all or most of the dividend for a year to build the common equity ratio up, if that's what the government wants, that's fine. But that isn't really the key to the future of Wells, unless the regulators make it the key to the future of Wells. The key to the future of Wells is continuing to get the money in at very low costs, selling all kinds of services to their customer and having spreads like nobody else has.

Bilibala => increase capital won't help the bank to increase earning, it will only give certain comfront and confidence to the general investors the the government is doing something and fully support the entire banking system.

How is Wells differentiated from the banks you own and the ones you don't?
Wells just has a whole different attitude. That's why Kovacevich calls them retail stores. He doesn't even like the word banking. I mean, he is looking to have a maximum enduring relationship with many, many millions of people. Tens of millions. And at the base of it involves getting money in very cheap. When you do that that's a helluva start in the business. The difference between getting your money at 1-1/2 % and 2-1/2% on a trillion-dollar asset base is $10 billion a year. It's hard to overemphasize that. He thinks more like Sam Walton than he thinks like J.P. Morgan. I'm talking about the individual there. He's a retailer. He's not trying to influence Washington or be the most important guy on the scene or anything like that. He's just trying to do business with millions of people every day and make a few bucks off of them.

Bilibala => how can Wells Fargo borrow low and re-borrow high? How can Wells Fargo pay less to the depositers and earn more on mortgagers? How can its net interest margin 1-2% higher than peers? I don't know. All I know is: it is an awesome bank that able to earn more $$ in every single dollar of assets.

Now that you mention it, Kovacevich has done a pretty good job of annoying Washington, wouldn't you say?

That's hard to tell. There's an advantage to being that way too. He's not going to cozy up or be sycophantic toward his regulator, and I would say most bankers probably are now. They need to be. But his strong point is retailing not diplomacy. I kind of like that. It's hard for a guy that knows his institution forward and backwards to have somebody come in that really may be working off a check list or something and is telling him what to do. And I'm sure that Dick gets antagonized by that sometimes. In the end, he's got the record. And he's got the business to back up what he's doing.

To the extent that his tangible common equity is low, a) nobody was even talking about that a year ago. And b) they should be talking about earning power. But it comes about in part because he saved the FDIC's bacon on Wachovia. I mean they had a deal on Citigroup (C, Fortune 500) that had big assistance involved in it, and the FDIC moved about what would have been about 5% of the deposits in the United States without a dime of expense to the taxpayer or the FDIC to Wells. And Wells took it over. And if they'd gone to Citigroup a) they would have looked like idiots, and within a very short period considering what happened to Citi. So to penalize them because they solved the FDIC's problem without cost to the FDIC would be a little crazy. And I imagine that's what gets Dick a little riled up.

Bilibala => yes, FDIC now cost less & bear less to safe Wachovia. At the same time, Wachovia significant strengthen Wells Fargo's asset base, customer base and deposit base.

So what is your metric for valuing a bank?
It's earnings on assets, as long as they're being achieved in a conservative way. But you can't say earnings on assets, because you'll get some guy who's taking all kinds of risks and will look terrific for a while. And you can have off-balance sheet stuff that contributes to earnings but doesn't show up in the assets denominator. So it has to be an intelligent view of the quality of the earnings on assets as well as the quantity of the earnings on assets. But if you're doing it in a sound way, that's what I look at.

Bilibala => that's a good insight about investment in bank.

How confident will you be in Wells when Kovacevich retires?
Well, John [Stumpf] is in charge. Dick is a terrific help to John. I play bridge with John on the Internet. He plays under the name of HTUR. His wife's name is Ruth. My bridge partner, who I probably play bridge with four times a week, developed online banking for Wells. A woman named Sharon Osberg. And she's worked with those people. And she told me about John Stumpf ten years ago. I've had some insight through her on these people. But the real insight you get about a banker is how they bank. You've got to see what they do and what they don't do. Their speeches don't make any difference. It's what they do and what they don't do. And what Wells didn't do is what defines their greatness.

Bilibala => should be fine, Wells Fargo's corp culture will not change. I like its conservative way to do business.

How is John's bridge game?
John is a very good bridge player. But he doesn't play as much as I do. I play all the time. He's smart. He's a different personality than Dick. Dick is a real sales person. They both subscribe to the same principles of banking. They just don't think you have to do things that the other guy is doing.

First Published: April 20, 2009: 6:13 AM ET