Wells Fargo has been in the news lately. Thanks to the scandal surrounding reports that bank employees have opened accounts without client’s approval. As a result, Wells Fargo’s share price has taken a beating, losing 14% of its market value for the year.
Berkshire Hathaway is the bank’s biggest shareholder with almost 10% stake. Its famous CEO, Mr. Warren Buffett is known as a long-time WFC fan, even praising the bank’s untarnished ethical culture. On the other side, the recent scandal raises a question of the bank’s integrity and trust. This is something that an ethical Mr. Buffett would not tolerate.
Mr. Buffett is still silent about the issue. However, it would seem impossible to liquidate a $20 billion worth of WFC without moving markets. It could slowly replace WFC in its might “Big 4” investments with Royal Bank of Canada (TSE: RY).
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In fact, there were no reports that a big Canadian bank has been connected with toxic subprime products during the financial crisis in 2008. Canadian banks have stick to the main business of banking, acquiring loan assets at commensurate risk. Consequently, banks such as Royal Bank of Canada have exhibited financial performance highlighted by higher returns on equity over a period of time.
As shown in the below chart, Royal Bank of Canada has produced consistent returns on equity between 18% to 19% with net profit growing from C$8.3 billion in 2013 to C$10 billion for the same period. Along with this, it has consistently increased its dividend per share from $2.53 in 2013 to $3.08 in 2015.
In comparison, US based banks could not even match its return generation. For example, Wells Fargo has return on equity of around 12%, the venerable Goldman Sachs (NYSE: GS) has only 6% and JP Morgan’s return on equity of almost