Wells Fargo Eyes A Larger Share of U.S. Manufactured Home Lending Business

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Wells Fargo (NYSE:WFC) made its intention to grow in the manufactured home communities (MHC) business clear earlier this week by bringing in two industry veterans to oversee its MHC unit. [1] The unit, which is a part of Wells Fargo’s commercial real estate (CRE) lending division, received a boost in April when the banking giant acquired a portfolio of $9 billion in CRE loans from G.E. [2] A chunk of the newly added portfolio was MHC-focused.

Wells Fargo is the largest player in the U.S. real estate industry by far, and enjoys an unrivaled position in the country’s mortgage as well as in commercial real estate lending market. To put things in perspective, the bank reported an outstanding CRE loan portfolio of over $130 billion at the end of Q1 2015 – roughly 8% of the $1.65 trillion in total CRE loans in the U.S. ((Assets and Liabilities of Commercial Banks in the U.S. (H.8), Federal Reserve Website)) With Wells Fargo eyeing faster growth in the business, this strong position will only be consolidated over coming years.

We maintain a $58 price estimate for Wells Fargo’s stock, which is around the current market price.

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The Federal Reserve’s decision to maintain interest rates at record lows since the economic downturn of 2008 has ensured that the U.S. banking industry would see steady growth in total loan portfolios over recent years. The loan growth hasn’t been uniform across loan categories, though, with commercial loans growing the fastest since 2010 even as total outstanding mortgages shrunk over the period. Commercial real estate loans stand out as being a category that has seen negligible change over the period – from $1.62 trillion in early 2010 to $1.65 trillion now.

WFC_CRE_15Q1

Wells Fargo’s CRE loan portfolio has mirrored the changes seen in the industry at large, with the figure peaking in late 2008 before falling to a low by mid 2011 in response to the economic downturn. The trend is captured in the chart below that shows the size of Wells Fargo’s average outstanding CRE loans for each quarter since Q1 2005. It should be noted that the huge jump in the figure for Q1 2009 is the result of Wells Fargo’s acquisition of Wachovia.

There has been a noticeable uptick in Wells Fargo’s CRE loan portfolio over the last three quarters, and the acquisition of $9 billion in loans from GE this April should send this figure above $140 billion for Q2 2015. We currently forecast an annual growth rate of 4-5% for the bank’s CRE loans over the future, but the bank’s focus on growing the manufactured home lending business could result in faster growth in the portfolio over our forecast period. You can see how changes in Wells Fargo’s CRE loan portfolio affects its share price by making changes to the chart below.

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Notes:
  1. Wells Fargo Expands Lending to Manufactured Home Communities, Wells Fargo Press Releases, Jun 23 2015 []
  2. Blackstone, Wells Fargo Buy $23 Billion of Property From GE, Bloomberg, Apr 10 2015 []