Wells Fargo’s Woes Driving Bank of America’s Gains Across Segments?

by Trefis Team
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Bank of America (NYSE: BAC) and Wells Fargo (NYSE: WFC) are two of the major banks, with a global presence, and a range of offerings spanning across consumer banking, commercial banking, investment banking, wealth management etc. Trefis has analyzed the revenue trends for Bank of America vs. Wells Fargo over recent years in an interactive dashboard, and observed that Bank of America’s growth percentage was more than 3x the Wells Fargo’s figure. While Bank of America has seen its top line swell over 2016-18 from the Fed’s rate hikes, Wells Fargo has seen its revenues remain under pressure in the aftermath of its account fraud scandal that was revealed in late 2016.

Notably, consumer banking is the largest contributing segment for both the banks. And Bank of America’s consumer banking arm has undoubtedly benefited from Wells Fargo’s misfortune over recent years – especially since the Fed’s enforcement order prohibits Wells Fargo from growing its balance sheet. However, Wells Fargo has done well to report stronger growth than Bank of America in its commercial banking segment over recent years.

How have total revenues for Bank of America and Wells Fargo trended over recent years?

  • Between 2014 and 2018, Bank of America’s revenues have grown from $84.9 billion to $91.2 billion, a growth of 7%.
  • In comparison, Wells Fargo’s revenue has grown from $84.3 billion to $86.4 billion, a 2% rise.
  • This difference could be attributed to negative growth in Wells Fargo’s consumer banking operations and Fed growth restrictions on the bank.
  • Further, the size of Wells Fargo’s investment banking and sales & trading division is significantly lower than its peer.

Additionally, details about the individual revenue streams of Bank of America along with our forecast for the next two years are available in our interactive dashboard.

Bank of America’s consumer banking revenues increased 6% over the last 5 years, whereas Wells Fargo’s figure decreased 11%.

  • Bank of America’s consumer banking revenues have fluctuated over the last five year. It reduced 10% over 2014-2016 — from $35.4 billion in 2014 to $31.7 billion in 2016, before reporting an increase of 18% over the next two years.
  • This enabled segment revenues to cross $37.5 billion in 2018.
  • Wells Fargo’s consumer banking revenues have shown negative growth over the last 5 years. It decreased 11% from $46.6 billion in 2014 to $41.3 billion in 2018.
  • Although Wells Fargo’s has reported higher segment revenues than its peer over the last 5 years, its growth rate was negative.
  • It was mainly due to lower mortgage production & servicing income.
  • On the other hand, Bank of America’s segment revenues are on a growth trajectory and have grown at an average annual rate of 8.7% over 2016-2018.
  • This growth was primarily driven by higher net interest income due to growth in outstanding mortgage loans.

Wells Fargo’s wealth management revenues were growing at a much faster pace till 2017

  • Bank of America’s wealth management segment has grown 5% between 2014 and 2018, going from $18.4 billion to $19.3 billion in revenue.
  • On the other hand, Wells Fargo grew with a significantly higher pace, with revenue rising from $14.2 billion in 2014 to $16.9 billion in 2017 – a 19% increase – before shrinking to $16.4 billion in 2018.

Commercial banking is a high growth segment for both the banks

  • Bank of America’s commercial banking segment has increased 24% over the last 5 years, from $13.3 billion in 2014 to $16.5 billion in 2018.
  • On the other hand, Wells Fargo recorded a 59% jump in its segment revenues, from $14.1 billion in 2014 to $22.5 billion in 2018 – primarily due to its acquisition of GE Capital’s Commercial Distribution Finance and Vendor Finance platforms in late 2015.

Details about how trends in Bank of America’s wealth management and commercial banking revenues compare with Wells Fargo are available in our interactive dashboard.

 

Bank of America’s sales & trading revenues were 6.2x of Wells Fargo’s figure in 2018

  • Bank of America’s sales & trading revenues has fluctuated over the last 5 years; it increased 4% from $13.2 billion in 2014 to $13.7 in 2018.
  • On the other hand, Wells Fargo’s sales & trading revenues have reduced 46% from $4.1 billion in 2014 to $2.2 billion in 2018.
  • Sales & Trading has contributed around 4% of Wells Fargo’s revenues over the last 5 years, whereas Bank of America has derived approximately 16% of its revenues from the segment.
  • Overall, the size of Wells Fargo’s sales & trading operation is significantly smaller than its peer, and the bank has further reduced its trading activities over 2014-2018.

Similarly, Bank of America’s advisory & underwriting revenues were 3x of its peer in 2018

  • Bank of America’s advisory & underwriting revenues has dropped 12% over the last 5 years, from $6.3 billion in 2014 to $5.5 billion in 2018.
  • On the other hand, Wells Fargo’s revenues have remained more or less stagnant, going from $1.7 billion in 2014 to $1.8 billion in 2018.
  • The size of Bank of America’s advisory & underwriting operation is much larger than its peer. It reported segment’s revenues of $5.5 billion in 2018 which was 3.1x of Wells Fargo’s figure.
  • In 2018, both the banks reported a drop in their revenues due to challenging economic conditions in the second half of the year.

Conclusion

  • Bank of America has grown 7% over the last 5 years, which is more than 3 times the Wells Fargo’s figure of 2%.
  • Wells Fargo’s consumer banking division is on a downward trend, whereas Bank of America has reported positive growth in the segment.
  • Further, Bank of America has significantly larger investment banking and trading operations compared to its peer.

Trefis estimates Bank of America’s stock (shows cash and valuation analysis) to have a fair value of $35, which is roughly 5% higher than the current market price (Our price estimate takes into account Bank of America’s earnings release for the third quarter).

 

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