It also explains why Warren Buffett was so eager to buy shares of Wells Fargo in 1990 after investors dumped its stock out of fear of a commercial real estate crisis in its home state of California. This sequence of events explains why the two most notable dips in Wells Fargo's profitability - in 19 - were followed immediately by meaningfully higher profits. In 1989, for example, it recorded a smaller provision than it did in 1985 despite nearly doubling in size in the intervening years. Most importantly, by setting aside so much in 1987, Wells Fargo positioned itself to earn record profits the two following years, as it could be less aggressive insofar as provisioning was concerned.
Because these are the functional equivalent of an expense on the income statement, the decision to set aside so much money in anticipation of future loan losses decreased Wells Fargo's net income that year by more than 90% compared to 1986.
Thanks to souring loans made to governments throughout Latin America, Wells Fargo nearly tripled its provisions in 1987. To a large extent, however, that drop was voluntary, stemming from Wells Fargo's notoriously conservative approach to loan loss provisions. In 1987, for example, its return on equity dropped from over 11% the year before down to less than 3%.
It's true that Wells Fargo has experienced troubles along the way. As you can see in the chart below, which contains profitability data gleaned from these reports, Wells Fargo hasn't lost money on an annual basis for at least half a century.ĭata source: Wells Fargo annual reports: 1967-2015. If anything, the California-based bank has every reason to feature it prominently. Unlike other banks, there is no incentive for Wells Fargo to hide its historical performance.
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