Wells Fargo & Company (NYSE:WFC)

• Credit Cycle

?Although high rates are better for the banking business than low rates, the period of time when the Fed is hiking rates is the most dangerous for banks due to the adverse effect of rising rates on the price of assets in their balance sheets.

?The recent fall of Silicon Valley Bank is an example of this danger. Is the March banking crisis over? I don't know, but even if it is, a tightening of credit in the foreseeable future is almost certain. To avert the outflow of deposits to money market funds, banks will have to compete for deposits raising the rates offered, resulting in higher funding costs that will reduce their profitability and their willingness and capacity to lend.

?Even if no more banks fail in this period of hiking rates, the start of a recession this year is more likely than not. All warning signals are flashing, except for unemployment, which is not a leading indicator. Trading at low P/E ratios, banks may seem cheap now, but earnings may still fall, taking bank share prices with them.

• Potential Negative Surprises

Of the big four US banks, I think that Wells Fargo might be the most likely to surprise us negatively in this difficult period. Although the banking business is not a favorite of Buffett and Munger, back in 1989 and 1990 Berkshire was buying Wells Fargo until holding just below 10% of the bank. Back then, Buffett and Munger only had words of praise for Wells Fargo management. But those times are long gone. This bank is not one of Berkshire's holdings today (or, more precisely, as of Dec 31, 2022) and Wells Fargo recent history is full of not confidence-inspiring practices and incidents. The last incident was the disappearing of balances and transactions in some customers accounts on March 10, right at the climax of the March banking crisis. The issue was fixed, but it's not very confidence-inspiring. And confidence is a scarce and crucial good needed by banks, nowadays more so.

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