Wells Fargo Eyes Retail Banking Opportunities in Eastern US
Wells Fargo (NYSE:WFC) is the second largest bank in the U.S. by market capitalization and competes with other prominent firms like Bank of America (NYSE:BAC), JPMorgan Chase (NYSE:JPM), and Citigroup (NYSE:C) among others. Since its acquisition of Wachovia in 2009, Wells Fargo has extended its presence as well as retail household base in the eastern U.S. However, as Wells Fargo’s product penetration among the retail banking households in the east is still low compared to the west, we believe the region offers tremendous potential for growth. We currently have a $32.18 price estimate for Wells Fargo, about 20% the stock’s market price.
Retail Banking Household Product Penetration Still Low in East
While the retail households per Wells Fargo store are nearly same in the west and east at 3,650 and 3,450 respectively, the retail bank household cross-sell (the number of banking products sold to each banking customer) in the west at 6.21 is ahead of the east by that has 5.22. [1]
This is reflected in the low retail bank household product penetration in the east as seen below.
| West | East | |
| Retail Checking | 91% | 90% |
| Debit | 85% | 77% |
| Retail Savings | 75% | 66% |
| Credit Cards | 33% | 14% |
| Insurance | 10% | 5% |
| Mortgage | 14% | 10% |
We believe this disparity offers an opportunity for Wells Fargo as it aims to increase its cross-sell, which at 5.79 is far below the average U.S. financial services consumer cross-sell of 14-16. While the retail checking, debit and retail savings accounts’ penetration rates are not so dissimilar in the west and the east, the penetration rate for credit cards and insurance in the west are almost 2.5x and 2x of that in the east.
Wells Fargo is the #1 bank-owned insurance brokerage in the U.S. and reported $2.1 billion in insurance fees in 2010. We forecast this figure to increase to ~$4.1 billion by the end of our forecast period. However if the bank is able to double its insurance product penetration in the east from 5% to 10% (same as that in the west), the insurance fee could increase at much more rapid pace.
In a scenario where Wells Fargo’s insurance fees increases to $6 billion driven by increased penetration in the east, there could an upside of 2-3% to our $32.18 Trefis price estimate for Wells Fargo. The impact will be even more pronounced if Wells Fargo manages to increase its penetration in the east across all its major retail banking product categories.
The average outstanding balance on Wells Fargo credit cards currently stands at ~$22 billion and we forecast it to grow over $40 billion by the end of the Trefis forecast period. However, the growth will be far greater if Wells Fargo is able improve its credit card penetration rate in the east to something similar as the west.
See our full analysis of Wells Fargo.
Notes:- Barclays Capital Americas Select Conference, Wells Fargo [↩]