ORGANIZATIONAL ANAYSIS PAPER WELLS FARGO & CO.

ANALYSIS

Organizational Analysis Paper - Wells Fargo & Co. Analysis

Business 596 Graduate Business Seminar Professor Marzwell

Wei Wang

ORGANIZATIONAL ANAYSIS PAPER WELLS FARGO & CO. ANALYSIS Organizational Analysis Paper Wells Fargo & Co. Analysis Current Situation Wells Fargo Today Wells Fargo & Company (WFC) is a diversified financial institution that provides banking, insurance, investment banking, mortgage, and business finance. Wells Fargo has more than 9,000 stores and more than 12,000 ATMs across North America and internationally (wellsfargo.com, 2013). Wells Fargo & Company was founded in San Francisco during the gold rush period. And now, Wells Fargo went in a new era of banking in 2008 after the acquisition of commercial banking giant Wachovia, which makes Wells Fargo the fourth largest bank in U.S. in terms of assets. Its main business lines are retail, commercial, and corporate banking services. And the branch of Wells Fargo provide services of brokerage and investment, wholesale banking, consumer finance, mortgage banking, leasing, agricultural finance, commercial finance, data processing, trust services, advisory, mortgage-backed securities, and venture capital investment. Among all of its 80 plus services, the largest business are wholesale banking, home and consumer finance, community banking, investments and insurance. History of Wells Fargo & Co. Wells Fargo bank has more than 150 years of history. The bank's early age date back to 1852, during the gold rush period, Henry Wells and William Fargo founded Wells, Fargo & Co (wellsfargo.com, 2013). The original bank offered banking services and secured delivery service of gold, notes, and other valuable assets. In the 1860s, Wells Fargo made its reputation of trustworthiness by operating the famous stagecoach line. It secures and

ORGANIZATIONAL ANAYSIS PAPER WELLS FARGO & CO. ANALYSIS delivers gold and other valuable assets through the Wild West and across the country. During the World War I, Wells Fargos delivery system was hired by U.S. government as part of its World War I plan. After the war, Wells Fargo reposition and rebuilt its whole business during the 20th century, and become a regional bank in California and operating in San Francisco as a bankers bank for the region. By the 1980s, Wells Fargo had become a major bank in California and the seventh largest bank in the US. In the 1990s, Wells Fargo expands its branches throughout the West, Midwest, and several Eastern states. And today, Wells Fargos customers are over 50 million households, and it owns more than 9,000 branches nationwide. There are more than 266,000 people working for Wells Fargo and leading by CEO John Stumpf (Wells fargo & compnay, 2013). Customer satisfaction and reputation. The following table shows Wells Fargo has a great reputation with its customer and the customer satisfaction is high (wellsfargo.com, 2013). Top 20 Biggest Public Companies in World (2012) Forbes Most Powerful Women in Banking Top Banking Teams (2012) 27th 45th Most Admired (World) (2012) Fortune 25th Revenue (U.S.) (2012) Fortune Best Corp/Institutional Internet Bank (North America) (2012, third consecutive year)Global Finance Magazine Best Bank for Payments and Collections (N. America) (2012)

ORGANIZATIONAL ANAYSIS PAPER WELLS FARGO & CO. ANALYSIS

American Banker 100 Best Corporate Citizens (2012) Corporate Responsibility Magazine

Most Respected (World) (2012) Barrons

Global Finance Magazine Excellence in Middle Market International Banking Services (2012) Greenwich Associates

As we can see, many of the most influential business magazines, such as Forbes, Fortune, Barrons, and Global Finance Magazine, value highly about Wells Fargo, especial when it comes to ethic of the corporation and customer services. Innovation. Meanwhile, Wells Fargo is also a very innovative company in banking service, in spite of that it is a more than 150 years old Corporation (wellsfargo.com, 2013). For example, Wells Fargo is dedicated to improve its convenience of its banking service for customer, and the most recent innovation is to allow customer to manage their account and daily expense with their mobile phone. Moreover, Wells Fargo was voted as top 10 innovators in mobile service by bank technology news. The following table shows the awards that Wells Fargo get in innovation area.

500 Most Innovative Companies (2012) Information Week First place for responsiveness (2012,

Top Innovator Mobile services (2012) CIO, Jim Smith, highlighted as Top 10 Innovator

Annual ranking of best U.S. retail bank Bank Technology News

ORGANIZATIONAL ANAYSIS PAPER WELLS FARGO & CO. ANALYSIS sites) Keynote Competitive Research American Banker Best Corp/Institutional Mobile SolutionProvider in North America (2012) Global Finance Magazine Best Corp/Institutional Website Design in the World (2012) Global Finance Magazine Best Consumer Internet Bank in U.S. (2012, third consecutive year) Global Finance Magazine #1 in North America Social Media for Consumers (2012) Global Finance Magazine Digital Marketing Strategy of the Year (2012) Retail Banker International Best Privacy & Security and Best Quality & Availability (2012, Keynotes Mobile Banking Scoreboard) Most A grades - product quality, of top five national banks (2012 Middle Market Quality Index) Phoenix-Hecht Most A grades for customer service and fraud prevention services (2012 Large Corporate Quality Index) Phoenix-Hecht The Innovators list for advances in mobile banking (2012) Bank Technology News

ORGANIZATIONAL ANAYSIS PAPER WELLS FARGO & CO. ANALYSIS

Keynote Competitive Research

Analysis of Commercial Banking Industry Description of the industry The participant bank in commercial banking industry offers financial service, such as commercial and customer loans (Jose, 2013). And banks also accept deposits from customers, using as the capital of funding the loans. The supervisory agency regulating this industry is Office of the Comptroller of the Currency. Banks are also insured by FDIC and follow its regulations. Key external influencers Many economy factors could have strong impact on the performance of banks. 1) Prime rate. The prime rate is the interest rate that banks charge to their big corporation customer with highest credit and lowest risk of default (Jose, 2013). The following figure shows the prime rate in recent years.

ORGANIZATIONAL ANAYSIS PAPER WELLS FARGO & CO. ANALYSIS

The banks revenue comes from the difference between prime rate and federal funds rate. Low prime rate could increase the demand of loans. And high prime rate could help banks access to a higher margin. As the figure shows prime rate change a lot during past years, but are expected to remain in low position in 2013 and 2014. 2) Aggregate household debt. Aggregate household debt includes all outstanding commercial loans, credit card loans, mortgage, car loans, and student loans (Jose, 2013). The industry revenue increase when aggregate household debt in high level. And it is positive relevant to households expectation of income. The aggregate household debt is expected to gradually increase in 2013. 3) Corporate profit. Commercial loans are a big part of banks revenue. And when corporation profit is high, banks are more likely to earn high profit. Corporate profit is expected to increase in 2013 (Jose, 2013). Major competitors in commercial banking industry There is over 7,000 banks in US, however, the number of bank as large as Wells Fargo is not a lot (Jose, 2013). The major players in commercial banking industry are JPMorgan Chase &

ORGANIZATIONAL ANAYSIS PAPER WELLS FARGO & CO. ANALYSIS Co., Bank of America, Citigroup Inc., and Wells Fargo itself. The following figure shows the competitive landscape of commercial banking industry and the market share of each major national bank.

As the figure shows Wells Fargo has the largest market share, which is 12.8% and is over 2% more than the second place JPMorgan Chase. The largest revenue of Wells Fargo comes from its community banking service, and it can generate more than 80% of revenue. In other words, Wells Fargos revenue mainly comes from small business customer, individual customer, and retail clients. The following figure shows Wells Fargos financial performance in last many years (Jose, 2013).

As we can see, Wells Fargo is slowly coming back from the loss in subprime mortgage crisis. But the pathway for Wells Fargo isnt very clear and is full of obstacles. And in 2010 and 2011

ORGANIZATIONAL ANAYSIS PAPER WELLS FARGO & CO. ANALYSIS Wells Fargos revenue actually decreases as a result of low increase in housing market as well as in mortgage market. JPMorgan Chase. The number one competitor of Wells Fargo is JPMorgan Chase. It has approximately 10% of market share in US. JPMorgan is one of the largest financial institution in the world, and now the largest bank in United States. It has about $2.2 trillion in assets. JPMorgan has total seven business segments: investment banking, retail financial services, card services, commercial banking, treasury and security services, asset management and corporate. The most contributed segments of JPMorgan Chase are retail financial services, card services and commercial banking. The revenue of retail financial service grows 16.2% last year. And the card service of Chase is one of the nations biggest credit card services generating over $125 billion in revenue annually. The commercial banking service is the smallest segment among the top 3, however, its quality is probably the best. The service face to variance of clients, including corporations, government agencies, and non profit organizations.

Bank of America. Bank of America (BoA) is the third largest bank in US judged by the size

ORGANIZATIONAL ANAYSIS PAPER WELLS FARGO & CO. ANALYSIS of revenue (Jose, 2013). The following figure shows the profitability of Bank of America.

However, Bank of America experienced a really bad hurt from the subprime mortgage crisis (Jose, 2013). Bank of Americas net income shows how badly the mortgage crisis affected its performance. From 2009 to 2012, Bank of America estimated loses $6.9 billion, $10.9 billion, $16.8 billion and $5.3 billion net income, respectively. As a result, Bank of America received $45 billion government loan under TARP in 2009. And Bank of America fell to the third place of commercial banking behind JPMorgan Chase and Wells Fargo. Moreover, Bank of America is projected to lose market share and keep downsizing the following five years. Porters Five Forces Analysis Porters five forces model originated from Michael E. Porter's 1980 paper "Competitive Strategy: Techniques for Analyzing Industries and Competitors." Since then, it has become a frequently used tool for analyzing a company's industry structure and its corporate strategy. In Porters theory, there are five competitive forces suited for every single industry and market. The model assesses the industry or companys strangeness toward these five forces to analysis the

ORGANIZATIONAL ANAYSIS PAPER WELLS FARGO & CO. ANALYSIS company or industrys situation (Industry Handbook, 2013). The following figure shows the framework of Porters five forces model.

Barrier to entrance medium In United States, to found a bank, it must be approved by the Board of Governors of the Federal Reserve System and obey the supervision, regulation and inspection of Federal Reserve System, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation (FDIC), and other federal regulatory agencies. And commercial banking industry is highly regulated. Banks are restricted in their range of activities, in acquisitions of other banks and in interstate banking activities. Moreover, banks also have requirement from FDIC of its capital level and reserve requirements. The following figure shows all the barriers for entering

ORGANIZATIONAL ANAYSIS PAPER WELLS FARGO & CO. ANALYSIS commercial banking industry and its respective level of barrier (Jose, 2013).

However, some financial companies still manage to entry the commercial banking industry. In 2008, both Goldman Sachs and Morgan Stanley converted from investment bank status into bank holding companies to increase their access to retail deposits Competitive Rivalry within the industry high The rivalry within the industry is rated high. In fact, the competition is based on customer service, interest rates on loans and deposits, quality and variety of products and services, lending limits and customer convenience (e.g. locations of ATMs). Although the number of commercial banks goes down rapidly while the number of ATMs goes up dramatically, the growth of number of banking offices continues and that shows customers needs more bank branches for their convenience. Other factors, such as transaction time, innovation, technology, reputation and price, also can affect the competition in commercial banking industry. In the near future, the intense competition is most likely to carry on, even heat up, in the banking industry, because merger and acquisitions in the financial industry produces larger, better capitalized and more geographically expanded banks. And economy of scale brought by mergers could give bank giants the ability to offer large variety of financial products and service at more competitive prices. On the other hand, the competition of retail deposit is also expected to be enlarged. The reason is that banks

ORGANIZATIONAL ANAYSIS PAPER WELLS FARGO & CO. ANALYSIS try to less dependent on wholesale market for funding, and more prioritize on retail deposits (Jose, 2013).

Threat of substitute Medium Banking belongs to wealth management industry (Financial services meet, 2011). And a point of view is that the substitute of bank is other kind of wealth management firms. What are they? For example, insurance company handles a lot of wealth management in US. And investment bank handles wealth management as well. Statistic shows that nowadays, the deposit in US has been decrease and the money flows to stock market through investment banks and security brokers. And ultimately, the money flows to business in every industry. So the substitute of commercial banking is rated as medium. Bargaining power of suppliers high The supplier of commercial banking includes Mutual fund companies, hedge funds, other

ORGANIZATIONAL ANAYSIS PAPER WELLS FARGO & CO. ANALYSIS broker dealers in structured deals, separate account managers, life insurance companies and companies looking to go public (Financial services meet, 2011). The bargaining power of suppliers has been increasing in the past two decades, for instance, suppliers now has to be paid up to 300% of their trailing 12 months productions and commission and benefit fee. Bargaining power of buyers high The bargaining power of buyer has been rising dramatically in recent (Jose, 2013). The industry used to have all information and buyers have no power to it. But now the industry shifts toward the favor of buyers. Because of the technology evolution, buyer can switch between banks very conveniently and at extremely low cost. So the bank has to try its best to sustain its customers, otherwise, customers will walk in competitor s door with their money. The bargaining power of buyer is high. The following figure shows number of investment grade corporation (big portion of banks customer) falling.

ORGANIZATIONAL ANAYSIS PAPER WELLS FARGO & CO. ANALYSIS

Vision and Value of Wells Fargo Vision According to Wells Fargos website, its vision is We want to satisfy all our customers financial needs and help them succeed financially ("Vision and value," 2013). Wells Fargo has a strong believe in its vision since the very first day when the vision is created 20 years ago. And Wells Fargo thinks their vision is even more relevant today than 20 years ago. With only 88 characters, the vision perfectly describes Wells Fargos spirit.

ORGANIZATIONAL ANAYSIS PAPER WELLS FARGO & CO. ANALYSIS Wells Fargos vision of financial satisfied, successful customers is based on a simple premise that believe customer in all business can be served better and save money and time. If customer brings their financial service to trusted bank and the employees know them well and provide warm hearted and precise guide and advice, and able to satisfied with their financial needs with all banks variety of products and services. This is exactly what Wells Fargo pursued ("Vision and value," 2013). In order to fulfill its customer centric vision, Wells Fargo requests its employees working hard, persistence and determination. Although Wells Fargo makes steady progress toward its vision to satisfy all customers financial needs and help them succeed financially, it still needs to learn, teach, and share a lot of things. Wells Fargos job is to let customer bring more work to them and satisfy their needs. The vision of Wells Fargo does not involve getting bigger, pursuing expansion of transaction, and selling more products, its all about building relationship with customers one at a time. Because everyone understands of financial success differs, Wells Fargos job to help variances from different customers and can be according to personal needs. Customers financial success probably includes the intention of financial security, and the desire to be financial literate. It also could include the intention to restrict to spending and saving plan and be disciplined, so they can afford their home, education, retirement life, or investment of business. Understand each customers financial pursuant is important and the first step for fulfilling and satisfying them. Moreover, Wells Fargo believes that their concentration of satisfying customer is the reason they work hard and could lead to their profitability. Value

ORGANIZATIONAL ANAYSIS PAPER WELLS FARGO & CO. ANALYSIS The value is the guide to every transaction, every conversation, every decision, and every interaction with employees and customers. Also, the value should be embedded into every Wells Fargos product and every service. And the values should be implemented to all team members and sculpture to every team member s soul, so that values on paper could worn out, but value in spirit never die. The five primary values of Wells Fargo are: People as a competitive advantage Ethics Whats right for customers Diversity and inclusion Leadership SWOT Analysis of Wells Fargo & Co. Strengths Strong domestic market position Cross selling Strong capital Weaknesses Unfavorable shift in earning assets and yields Weak international market position Expense management Opportunities Increase in Wealth Management industry Immigrant customers Online customers Threats Losses from Wachovia acquisition Regulatory challenges Uncertain economy in US

ORGANIZATIONAL ANAYSIS PAPER WELLS FARGO & CO. ANALYSIS Strengths Strong market position in US. Wells Fargo has strong market share in US banking industry (Wells Fargo & Company SWOT Analysis, 2012). It is the fourth largest bank in size of assets in US. It also is leader many financial service segments, for instance the mortgage segment, used car lender, and small business segment. As a result, strong market position could leads to significant economy of scale for Wells Fargo. Cross selling. Wells Fargo is the largest producer and consumer of cross selling for financial products (Wells Fargo & Company SWOT Analysis, 2012). For example, one fourths of its customer has eight or more product and forty percent of customer has six or more products. It is Wells Fargos goal for its customer to carry eight products. Cross selling could bring higher return on investment and cost leadership over other competitors. Strong capital base. The companys capital reserve has been increasing in last few quarters. Its tier 1 capital increases from $93.8 billion in the year of 2009 to near $114 billion in year of 2011. Therefore, tier 1 capital ratio increases from 9.25% to 11.33% in the time period from 2009 to 2011. Capital could use to cushion against market uncertainty. Wells Fargo has less risk of capital loss than its competitors. So it is expected to remain strong capital base. Weaknesses Unfavorable shift in earning assets and yields. Due to weak loan demand, Wells Fargos earning assets has slightly shifted from loan to more liquid assets during 2010 (Wells Fargo & Company SWOT Analysis, 2012). At the same time, average interest-bearing core deposits increased to 58.6% of average earning assets for 2011, from 51% for 2008. Consequently, the

ORGANIZATIONAL ANAYSIS PAPER WELLS FARGO & CO. ANALYSIS company's net interest margin (NIM) declined to 3.89% in 2011 from 4.83% in 2008. Weak international market share. Wells Fargo is weak for international expansion. The US assets add up to its almost 100% of total assets. And domestically, Wells Fargo is not spread very wide geographically, its business focus on the Midwest and Southeast. It also makes Wells Fargo weak against probable US economy downturn. Weak expense management. The efficiency ratio, which measure banks expense management, is rising in last few years. It means that noninterest expense raise in terms of total revenue. As a result, the companys margin decreases. Opportunities Wealth management. Post Wachovia merger Wells Fargo has 15,000 financial advisors managing $2 trillion in client assets through bank, private client and independent channels. The company provides private banking, trust and family office services to affluent investors, from those just beginning to accumulate wealth to those who have many financial services needs. Wells Fargo is one of the nation's top-seven retirement record keepers. It also one of the nation's largest retirement administrators and a leading distributor of IRA and annuity products. The company's focus on wealth management is likely to yield favorable results both in the near and long terms (Wells Fargo & Company SWOT Analysis, 2012). Online banking. Wells Fargo is one of the early adopter of online banking. And the bank is continuously working on its online service and mobile services customer interface to make it more beautiful. Online banking service could dramatically simplify the companys ability to gain customer without increasing much of marketing cost. Thus, the banks contribution margin could

ORGANIZATIONAL ANAYSIS PAPER WELLS FARGO & CO. ANALYSIS be increasing because of online banking. Threats Losses from Wachovia acquisition. Although the acquisition of Wachovia could help Wells Fargo get access to a few profitable market, it is still affecting Wells Fargos near financial performance. It is reasonable to believe that the total cost to Wells Fargo from mortgage securities is still hard to quantify. Losses from Wachovia acquisition could continue to affect the company's financial position and performance in the near term (Wells Fargo & Company SWOT Analysis, 2012). Increasing regulatory challenge. Increasing regulatory challenges not only increase non compliance risk, but also increases compliance spending. Uncertain economy. US economic growth prospects are increasingly looking uncertain. Slow job market recovery and weak consumer spending are big concern to not only consumers, but also organizational investors (Wells Fargo & Company SWOT Analysis, 2012). In fact, consumer spending falls by 0.5 percent in June, 2012, and 0.2% in May. However, homeowners are expecting home price to boost in one year, and bullish housing market. As a result, whether the confidence in housing market could offset the weakness in job market and consumer spending determines the future of US economy. Personal Assessment Strengths SWOT Analysis Weaknesses

ORGANIZATIONAL ANAYSIS PAPER WELLS FARGO & CO. ANALYSIS Strong international background Good education Opportunities Economy recovery Strong Chinese group in California Lack of understanding of US market English is not mother tongue Threats Regulatory challenges

Strengths Strong international background. I can offer Wells Fargo my experience with international customers, since I am international student for many years. And Wells Fargo has a big part of customer are immigration, I could understand their financial needs better. Good education. I am highly educated with master degree in finance education. So I am capable of doing finance services. Weaknesses Lack of understanding of US market. Since I was born and raised in China, and there are a lot of difference between Chinese financial industry and US banks, I am a little less familiar with US bank. English is not mother tongue. It could be a big disadvantage when compare to native speakers, because it is a little less connected with people when using language other than mother tongue. However, perusing master degree in US teaches me sufficient language skills. Opportunities

ORGANIZATIONAL ANAYSIS PAPER WELLS FARGO & CO. ANALYSIS Economy recovery. Many signals show the economy is recovery and as well as the job market. Strong Chinese group in California. There are a lot of Chinese in California, especially in Los Angeles area, and a lot of Chinese owned firms as well. So it is always a shortcut to find a job in Chinese firms. Threats Regulatory challenges. There are many limitations for international student to find job. For example, it is illegal to work outside campus while studying. Financial Analysis The following table is the highlights of Wells Fargo & Co. from the year of 2012.

ORGANIZATIONAL ANAYSIS PAPER WELLS FARGO & CO. ANALYSIS

As we can see, Wells Fargo has a very healthy over - all financial situations. Earning Analysis The following tables indicate Wells Fargos ability of earning.

ORGANIZATIONAL ANAYSIS PAPER WELLS FARGO & CO. ANALYSIS

Balance Sheet Analysis The following table shows Wells Fargos balance sheet information at the year end of 2012.

ORGANIZATIONAL ANAYSIS PAPER WELLS FARGO & CO. ANALYSIS

ORGANIZATIONAL ANAYSIS PAPER WELLS FARGO & CO. ANALYSIS

ORGANIZATIONAL ANAYSIS PAPER WELLS FARGO & CO. ANALYSIS Reference Financial services meet porters five forces. (2011). Retrieved from http://consultingwithresults.wordpress.com/2011/08/03/financial-services-meet-porters-fiv e-forces/ Industry Handbook: Porter's 5 Forces Analysis. (2013). Retrieved from http://www.investopedia.com/features/industryhandbook/porter.asp Jose, E. (2013). Ibisworld industry report 52211 commercial banking in the us. Retrieved from http://0-clients1.ibisworld.com.leopac.ulv.edu/reports/us/ industry/default.aspx?entid=1288 Vision and value. (2013). Retrieved from https://www.wellsfargo.com/invest_relations/vision_values Wells Fargo & Company SWOT Analysis. (2012). Wells Fargo & Company SWOT Analysis, 1-8. Wells fargo & compnay. (2013). Retrieved from http://www.vault.com/wps/portal/usa/companies/company-profile/Wells-Fargo-&-Compan y?companyId=1161 WellsFargo.com. (2013). Retrieved from https://www.wellsfargo.com/downloads/pdf/about/wellsfargotoday.pdf