Buffett Technically Only Sold a Small Portion of His Wells Fargo Stock
Warren Buffett, the legendary investor hailing from Omaha Nebraska, reportedly sold some of his Wells Fargo, which is not entirely accurate. Berkshire Hathaway, the company which Buffett runs said “the commitments that would be required of us” to maintain a higher stake “would materially restrict our commercial activity with Wells Fargo.” There are specific rules which do not allow companies' to typically own more than 10% of the stock of a commercial bank.
The Wells Fargo stage coach has been in a metaphorical rut ever since a sales scandal was reported in September and some outlets reported that the sales scandal was the reason Buffett sold. The fact is Buffett sold only 9 million shares or approximately $500 million, which is a small fraction of his approximately $24 billion dollar stake or 473 million share stake.
A good cure for a scandal is strong profits; last Thursday, WFC reported $5.5.B of net income and diluted EPS of $1.00. Net interest income also rose to $12.3 billion, which was 5% higher than the prior year. Net interest income represents revenue from interest related banking activities less interest expense accrued such as interest paid to depositors and long-term loans.
The company also experienced $11.1 billion in loan growth or 1% from the prior quarter which is over over 4% annualized. However, WFC's efficiency ratio increased to 62.7% up from 58.7% in the prior year. Efficiency ratio is non bank expenses (non interest expense) to total revenue (total revenue is net interest income + non interest income). WFC expects the efficiency ratio to continue to be elevated, which will hurt return on equity and possibly profitability.
While the reports that Buffett sold Wells Fargo only have a small grain of truth to them, the fact is, the legendary investor is likely not pleased with its declining metrics. He like other investors may wonder how long efficiency ratios remain elevated for as WFC seeks to introduce new ways to market its brand, which do not rely on employees as aggressively cross selling products.
WFC's full quarterly filing can be found here.