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Comparison analysis of CITI Bank and Wells Fargo Bank in the most recent five years (2016-2020)
Dr. JINGYI (JANE) JIA
Fin-440-525
December 1, 2021
Risk analysis
Credit risk (Udghosh)
Loss experience
Net loss to average total loans and leases = Gross loan and lease charge-off - gross recoveries (includes allocated transfer risk reserve charge-off and recoveries) ÷ average total loans and leases
The net loss to average total loans and lease for citibank is above or at 1 for most of the years except 2018. This shows that for most of the years the banks average gains from loans and leases has matched those of the net losses experienced. The bank has experienced the same level of losses as gains. Comment by Jia, Jingyi: This ratio is not related to gain. Here the numbers are percentages: 1 means 1%
The net loss to average total loans and leases for Wells Fargo on the other hand was reported below the 1 ratio ranging from 0.29 to 0.35 over the five year period. The bank's gains from loans and leases are much higher compared to the net losses experienced by the bank. Wells Fargo has experienced very low losses over the five years with very high gains during the period. Comment by Jia, Jingyi: Again. Gain is not relevant here. Please explain.
Expected amount of losses Comment by Jia, Jingyi: Here you should use noncurrent loan ratios
Loan & Lease Allowance Net Losses (X) = Ending balance of the allowance for possible loan and lease - financing receivable losses ÷ net loan and lease losses.
The expected amount of losses by the bank can be measured from the allowance placed on loans and lease to cover write off. Comparing this measure to the net loss gives the impression of the amount of losses expected by the firm from those previously experienced. For both banks the ratio of loans and leases allowance to net losses was higher than 1 meaning that the bank put in more to cover the expected loans and leases compared to the net losses incurred.
Citibank had a lower ratio compared to that of Wells Fargo indicative of a higher net loss for a standardized loans and leases allowance across the industry. For the standardized loans and lease allowance, Wells Fargo registered huge losses in 2016 and 2019.
The expectation from the curve of both banks is that the industry expects a much lower loss level in the coming year (2021). This is demonstrated by the high loans and lease allowance to net losses reported in 2020. Both ratios are above 3, showing that the ending balance of the allowance for possible loans and leases is expected to be at least three times as high as the net losses experienced.
Bank preparedness
Earnings coverage of Net Losses = net operating income before taxes, before securities
gains/losses, before extraordinary items + provision for loan losses (not annualized)/net loan and lease losses
Both Citibank and Wells Fargo have a similar trend in their earnings coverage ratio. They start from a medium level in 2016 before steadily rising to a peak in 2018 and falling drastically in 2020. It is however important to note that the earnings coverage to net losses of Wells Fargo is much higher than that of Citibank in all the years presented, indicating Wells Fargo is better prepared for the future losses. Both banks have a rate higher than 1, in fact for all the years examined the ratio exceeds 3. Therefore, the earnings coverage used against net loss is at least three times the expected losses for the year. The banks are therefore highly prepared to take on any losses incurred even though the advent of the pandemic in 2020 almost destabilized this allocation.
Wells Fargo credit risk is much lower compared to that of Citibank. The bank experienced very low net losses over the five years and projected an even lower loss level for the period ending 2021. Furthermore, the earnings coverage of the bank is much higher than that of Citibank.
Liquidity risk (Udghosh) Comment by Jia, Jingyi: You should also use the following ratios: short-term investments, core deposits and pledged securities
Net loans and leases to total deposits = Loans and lease-financing receivables net of unearned income and the allowance for possible loans and lease financing receivable lose ÷ total deposits
The net loans and leases to total deposits of both banks follows a similar trend starting from a ratio level above 60 and ending just below 60 (for Wells Fargo) and just below 50 (for Citibank). The amount of liability (total deposits) on Wells Fargo’s books is less than the assets presented (loans and leases).
The liquidity risk of Citibank is higher compared to that of Wells Fargo as the bank (at the same risk level) would be unable to meet its short-term obligations using teh loans and leases amounts in their books. In 2017, the liquidity risk of Citibank reduced while that of Wells Fargo increased to an almost equal level indicative of Wells Fargo taking in a lot of deposits and in turn liabilities. Comment by Jia, Jingyi: Here you should say compared to Wells Fargo, Citibank has to borrow more short-term funding in order to support the lending business. The reason is that short-term noncore funding incurs higher borrowing cost and it is unstable since it is not guaranteed by FDIC.
The liquidity risk of both banks is very low however, Wells Fargo has a better liquidity risk score compared to Citibank. Well Fargo is therefore able to meet its short-term obligations when they come due better than Citibank. The downward trend of liquidity risk for both banks, however, shows that the liquidity risk across the industry is getting worse. Although this may be attributed to the COVID 19 pandemic, the trend might revert after lifting of curfew rules across different regions.