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Getting Smaller Only Can Help Wells Fargo & Co Stock

James Brumley

Earlier this week, mega-bank Wells Fargo & Co (NYSE:WFC) dished out a bit of a surprise to the market, and to owners of Wells Fargo stock in particular, when it announced it would be selling 52 branches to smaller Flagstar Bancorp Inc (NYSE:FBC).

No one’s really complaining, to be clear. Most of the locations in question were in Indiana, a few of them were in Michigan. Four were in Wisconsin, and one was in Ohio. They were never major markets for the company though, and without a clear toehold to effectively latch onto, the company may well be better served by focusing on higher-payoff prospects.

The move, however, may also may also be something bank investors besides owners of Wells Fargo stock take to heart. This kind of retreat may be something we see more of from the nation’s biggest banks that not recognize one size does not fit all.

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It’s All About the Bottom Line

The official release from the company didn’t belabor or detail the point, but The Motley Fool’s Jordan Wathen crunched the numbers and found that the average total deposits for the 52 branches in question was around $44 million. That’s roughly two-thirds of Wells Fargo’s average of $66 billion.

Given the size of the bureaucracy needed to keep the company’s roughly 5,000 branches up and running, it’s possible this market simply wasn’t profitable after chipping in to pay for its share of corporate expenses, and wasn’t ever going to be.

A much leaner, smaller Flagstar Bancorp shouldn’t face the same problem.

To some it’s being chalked up as an anomaly, unique to a company that was already struggling with the fallout from an account-opening scandal that just won’t go away. Take a closer look, though, and you’ll see subtle (and some not-so-subtle) signs that the banking industry realizes massiveness comes at a price.

Not the First Time

One has to read between the lines to appreciate it, but the big banks that have mastered a formulaic approach to growth and planted those seeds across the nation are finding that what works in one place doesn’t necessarily work in another. That’s why many corporate headquarters are pushing some decision-making power out to regional or even local offices.

Just for the record though, this isn’t the first time a mega-bank has abdicated a mostly-rural market where incomes and account balances may not mirror this in a more urban setting. Bank of America Corp (NYSE:BAC) has quietly shed nearly 1,600 branches located in rural America over the course of the past few years, realizing they weren’t paying for themselves.

To the extent large bank entities couldn’t and still can’t service this set of customers, it’s only apt to become a bigger problem.

How so? Many of the Dodd-Frank rules that went into effect following 2008’s sub-prime meltdown are going away, with President Trump signing a sweeping dial-back of most of those rules late last month.

While the primary intent of the new law was to ease the burden on all banks, one of the side effects was dramatically easing the regulatory burden on smaller and mid-sized banks.

Many of them can now effectively merge their way to greater reach, and not bump into the ceiling that would qualify them as “systemically important” banks that raises the regulatory bar. If the large banks thought they were having a tough time competing with local and community banks before, it just became even tougher.

It’s possible Wells Fargo recognized the new, laxer rules as the proverbial last straw in Indiana and Michigan.

Bottom Line for Wells Fargo Stock

Don’t cry too much for Wells Fargo, and don’t interpret the retreat from some under-penetrated rural markets as a reason to dump your Wells Fargo stock, or any other big bank stock for that matter. All of them are in the same boat, but none of them are going to be toppled.

Still, it’s a development that does raise the question: In an environment that’s increasingly moving banking business online anyway, what are the mega-banks like Wells Fargo going to do to prove they’re growing. The geographic market, as well as the banking market as a whole, is already rather well saturated.

In the meantime, the nuanced decision also suggests smaller and regionally-focused banks are in a sweet spot.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter, at @jbrumley.

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