07/22/2015 04:12 AM ET

Wells Fargo & Co. Is the Earth’s Most Valuable Bank

By Emily Glazer

Quick: Can you name the most valuable bank in the world?

It isn’t who you think.

San Francisco-based Wells Fargo & Co. recently surpassed Industrial & Commercial Bank of China Ltd. as the lender with the largest market value in the world. Now, Wells Fargo’s market capitalization is approaching $300 billion, a first for a U.S. bank—and $42 billion and $120 billion more than J.P. Morgan Chase & Co. and Citigroup Inc., respectively.

The shares traded lower Tuesday, putting Wells Fargo about $1.3 billion short of the milestone.

After a 13.5% gain in the past 12 months, Wells Fargo is now the seventh-largest stock in the S&P 500 index.

The bank’s size underscores the relative strength of the U.S. economy, as China is racked by stock-market gyrations and Europe labors with existential questions about the eurozone.

Even after paying tens of billions in regulatory settlements stemming from the crisis, U.S. banks have recovered handsomely. The KBW Bank Index, a measure of large U.S. bank stocks, is trading near a postcrisis high. And J.P. Morgan, the largest U.S. bank by assets and second-largest behind Wells Fargo in market value, hit its own all-time stock record of $69.75 a share June 23.

Wells Fargo’s market value surpasses those of all peers thanks largely to its relatively simple business, which doesn’t rely on many complex derivatives or risky trades using borrowed money. Shares at Wells Fargo trade at 1.78 times the company’s book value, compared with 1.18 times at J.P. Morgan and 1.02 times at ICBC, which has suffered recently from concerns about the Chinese economy.

“There’s just no question the industry is so much stronger than what it was six, seven, eight years ago,” said John Stumpf, the bank’s chairman and chief executive, in an interview. “The U.S. economy is doing quite well, especially in relative terms to the rest of the world.…There’s [also] been a lot of capital and liquidity raised” by the banks.

Wells Fargo has its vulnerabilities. Some analysts point to cost controls and a loan book with exposure to falling energy prices. Others note that its shares are priced on the expensive side compared with its book value, and that banks often haven’t held the market-cap title for long.

But Wells Fargo isn’t like many of its competitors. It is the No. 1 player in U.S. mortgages but is relatively small in trading, a business that has attracted heavy regulatory scrutiny and higher capital requirements. J.P. Morgan’s corporate and investment bank, which includes trading, made up 36% of the firm’s revenue in the second quarter, while the similar division at Wells Fargo, where trading is even smaller, was 29% of revenue.

On Monday, the Federal Reserve told eight of the country’s biggest banks how much extra capital they would need to set aside to protect against losses. Of the six largest banks, Wells Fargo, the fourth largest by assets, has the smallest surcharge—2%—compared with 4.5% at J.P. Morgan and 3% at Bank of America Corp. and Goldman Sachs Group Inc.

Why is Wells Fargo valued the way it is? Largely because the very traits that were considered a weakness a generation ago are now regarded as a strength. The bank has largely eschewed investment banking and trading income, which has endeared it to regulators. That means the bank has fewer capital demands, which lowers its lending costs and increases its ability to pay dividends and buy back shares.

One particular practice that has put Wells Fargo in the good graces of regulators is its sparing use of derivatives, which are contracts banks use to hedge or speculate on various price movements, often using borrowed money. According to a recent study by the Office of the Comptroller of the Currency, Wells Fargo had $5.8 trillion in notional value of derivatives on its books, compared with $47.2 trillion at Bank of America Corp., $56.2 trillion at J.P. Morgan and $56.6 trillion at Citigroup.

Many investors are also betting on Wells Fargo as a way to benefit if interest rates rise. The profitability of consumer banks like Wells Fargo often increase as the economy heats up and long-term bond yields climb.
“A lot of funds have gravitated toward Wells Fargo because it feels like a cleaner story,” said David Konrad, head of bank research at Macquarie Group Ltd.

Despite being the largest U.S. mortgage lender, Wells Fargo hasn’t weathered as many regulatory fines as others in the industry. Wells Fargo has yet to pay a major fine to the Department of Justice over residential mortgage-backed securities, whereas Bank of America doled out $16.65 billion, J.P. Morgan paid $13 billion and Citigroup clocked in at $7 billion over roughly the past 18 months.

As for global valuation, Wells Fargo has wrestled with ICBC for the top spot for years. It first ousted the Chinese lender from the most-valuable spot in 2013. Citigroup, which was the most valuable U.S. bank before the financial crisis, today is fourth most valuable.

Chinese bank performance has been sluggish as the country’s economy slows. Its state-run banks were able to deliver double-digit growth for years. But bad debts and a slowing economy are taking their toll. ICBC Chairman Jiang Jianqing said in a March briefing that “it is no longer possible to maintain such high growth levels.” ICBC shares have fallen about 19% in the past three months, according to FactSet.

“At this point now, we’re starting to see companies’ actions start to impact the bottom line,” said David Ellison, a portfolio manager at Hennessy Funds who owns shares of J.P. Morgan and Wells Fargo. “Whether it be cost initiatives, repositioning the balance sheet…we’re seeing the benefits of a good banking system.”

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