At a Barclays conference in September, Wells Fargo and U.S. Bancorp presented virtually identical slides touting their rank as the first and second best-performing major U.S. banks in return on equity, return on assets and the so-called "efficiency ratio," which analysts use to measure how effectively banks manage costs. By all three measures, U.S. Bancorp, the nation's fifth-largest bank, is tops, and Wells Fargo is No. 2. They also pay out more of their earnings to shareholders, in dividends and share buybacks, than any bank other than Citigroup.
Both banks mostly eschew the razzle-dazzle of trading and investment banking to focus on bread-and-butter businesses, like mortgage and car lending, as well as Main Street–oriented commercial loans. U.S. Bancorp has nearly doubled its consumer-loan market share since 2007, the year after Buffett began building what is now about a 4 percent stake, and grabbed almost 7 percent of the market for middle-market syndicated loans, up from nearly zero before the recession. Wells Fargo is the nation's largest lender in mortgages, small-business lending and auto loans.
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In particular, both banks have worked on building up fee income to reduce their sensitivity to interest rates and credit risk. Wells Fargo generated 49 percent of its second-quarter revenue from fees, and U.S. Bancorp generated 46 percent, ranking 1 and 2 among top U.S. banks by the ratio of fee income to total assets.
Bank of New York Mellon, which has become one of Berkshire's top 10 holdings in recent years even though it isn't similar in business mix to his other favorite banks, is a different way to approach the rate-sensitivity problem: 79 percent of BNY Mellon's revenue is fee revenue from services, including investment management and bank custody and clearing, which can be described as showing a "hyper-sensitivity" to rate-based banking.
Given their focus on lending, the knocks on Wells Fargo and U.S. Bancorp have been persistently low-interest margins (the spread between what banks pay for deposits and collect on loans) and sluggish loan growth, said Raymond James analyst Anthony Polini. Loans should pick up in line with the resurgent U.S. economy, and the two banks' spreads are still wider (i.e. better) than peer banks' spreads, Polini said.
In a few years, when interest rates are more normal, loan growth is really going to be robust,'' U.S. Bancorp CEO Richard Davis told the Barclays conference. "We're getting close to an inflection point.''