Several years ago, Wells Fargo was regarded as arguably the best-run major franchise in financial services. Bank of America looked like the biggest bungler. Wells skillfully weathered the financial crisis by sticking to reliable branch banking and shunning risky mortgage securities. BofA bet heavily on real estate loans at the height of the craze, and barely survived the meltdown.
In the aftermath, however, the fortunes of the two banks have undergone a stunning reversal. Wells promoted a go-go sales culture that exploded into scandal with the disclosure in 2013 that employees were opening fake accounts to generate bonuses for boosting sales. Since then, Wells once-sterling reputation has been tarnished by big fines, and embarrassing testimony before Congress.
By contrast, BofA CEO Brian Moynihan––widely dismissed as a colorless plodder––charted a far more conservative course for Bank of America. Moynihan championed steady, old fashioned retail banking, where institutions funnel cheap deposits into low-risk home and credit card loans. The idea was in many ways the opposite of the Wells approach. BofA emphasized growing with today’s customers, the folks whose credit histories and financial needs you know, instead of luring new ones.
The up and down trajectories are best illustrated by the course of the two banks’ market caps. As recently as mid-2015, Wells’ value stood at $302 billion. That was $113 billion—or 37%—higher than BofA’s $189 billion market value. Since then, Wells’ shares have dropped by 12%, from $58 to $51. Over the same two years, meanwhile, BofA’s shares have jumped 34%, from $18 to $24. As a result, BofA’s valuation now stands at $237 billion, or just 6.8% below Well’s cap of $253 billion.
In other words, BofA is now worth $50 billion more than it was two years ago—and Wells is worth $50 billion less.
Of course, Wells Fargo remains a highly profitable franchise, posting $5.8 billion in net earnings for the second quarter of 2017, a number that edged BofA’s $5.3 billion in profits. Warren Buffett remains a big believer in both franchises. His Berkshire Hathaway is a large and loyal shareholder in Wells. And Buffett, who in the dark days of 2011 purchased warrants on 700 million shares of BofA for $7.15 per share, just exercised those warrants to become its largest shareholder.
Nevertheless, BofA has raced from far behind to a virtual tie with Wells in market cap. Investors, including Buffett, who bet on the once-beleaguered BofA have fared far better in recent years than those backing Wells. To be sure, JPMorgan Chase remains the champ among U.S. banks. But the contest for No. 2 is now what few foresaw, a real horse race, with the plodder gaining on the rail.