We all remember the drastic blow the 2009 financial crisis dealt to the financial market. Customers soon started to mistrust financial institutes and still do now to some extent. As we've recently seen with the financial meltdown of Cyprus, the financial crisis won't be going away any time soon. With the customers of the banks in Cyprus now constantly withdrawing money to avoid paying the EU’s proposed tax on their savings, this could slowly lead to a bank run. If it does happen on a big scale, the American banks mentioned above may lose money if any of the Cypriot banks go bust. They may also lose money on any investments made in Cyprus.
However, it's not all bad news for these American banks. As Europe becomes ever more insecure, savers are taking their money out of their current (EU) banks and saving it in the U.S. Whilst investments may make a loss in Cyprus an increase in savers (for the U.S.) is good. If the new savers’ money is used to re-invest in new projects somewhere else within the EU, however, and the new investments make a loss too, the losses will accumulate.
Wells Fargo & Co. has attracted the attention of Berkshire Hathaway Inc. (BRK.A)(BRK.B), the famous Warren Buffet company. Buffet is the second richest person in the world and accumulated his wealth through investments. With Bill Gates being the richest person, Warren Buffet is the richest investor in the world. Berkshire Hathaway has had a holding in Wells Fargo & Co. for years, but they have recently increased their stake.
Wells Fargo made an 18.1% gross profit and a 16.7% net profit in 2011. For every $1 of assets it owns, it has $0.88.8 of debt.
JPMorgan Chase managed to make an 87.7% gross profit and a 17.1% net profit in the same year. However, while the gross profit seems large, this is due to certain expenses, like compensation and provision for credit losses being counted as expenses instead of direct costs to their sales. While this is normal accounting practice, it is important to highlight this when making a decision about these ratios. For every $1 of assets it owns, it has $0.91.8 or $0.92 (rounded up) of debt.
U.S. Bancorp made a 22.3% gross profit and 24.02% net profit in the same year – a higher net profit due to extra, unrealized income (one off incomes). For every $1 of assets it owns, it has $0.89.7 of debt.
I haven't discussed the levels of debt for each individual company as it's important to bring all three levels together. They will inevitably be high for all three due to the effect that the financial crisis had on all financial companies. If these companies possessed more debt than assets, then there would be cause to worry about the risk of the stocks. However, that doesn't mean that these high levels of debt are completely risk free, any high level of debt is riskier than a low level of debt.
Wells Fargo & Co is making a decent gross profit and net profit. While it has a reasonably high amount of debt, it most likely is due to the financial crisis. However, this doesn't completely take the risk out of this stock; all financial stocks are risky at the moment. This is why it's important to break this stock evaluation in two. If you're willing to take on this risk and put it down to the crisis, then this would be a BUY. If the famous Buffet has increased his stake in this company, there most certainly must be a reason why. However, if this seems far too risky, as this level of debt may not be entirely down to the crisis, then this stock would be a HOLD. If this is the case, I would rate all financial stocks as HOLD as the financial market needs to recover before investments are made.