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I've Been Warning About Wells Fargo Since Spring of '07 - The Doo Doo
I run a rather
interesting site. I believe I provide uncommon analysis, and due to
that fact it is not necessarily appreciated by the masses. Point in
case: I say X company is fundamentally weak and the share price
subsequently goes up and/or they report "record" earnings. There are
some that then regard my analysis as wrong or irrelevant, or worse yet
not applicable because it uses the fundamentals. It is unfortunate that
such a large cross section of investors now truly believe that
fundamentals no longer apply - or worse yet believe short term price
movement is the grand arbiter of value! Fundamental analysis is
basically the measurement of value against risk. When one believes
these principals no longer apply, then one no longer has confidence in
the capitalist system and/or one has been hoodwinked by the most recent
bubble/burst. This is where I believe we are now, and so shortly after
just three bubbles were blown and popped in the last decade. - with one
just popping last year! That's right three, literally one every three
years or so - dot.com/telecomm, real estate/credit, and now the
government induced equity bubble. We can arguably throw 2007 oil in
there as well. Those that follow me know that this is what I do for a
living - see "The Great Global Macro Experiment, Revisited".
Understanding my proprietary investment style
As you can see, there is a reason why they call this BoomBustBlog!
Many people believe we have hit that trough in March of this year. I
don't. Even if we did, we have literally approached bubblicious
territory again which sets us up for another spin at the asset cycle.
Alas, I digress... Back to the point. I am a capitalist and believe in
the principals of capitalism. Thus, I do tend to adhere to the
fundamentals. Sooner or later, the market always returns to the
fundamentals. The ensuing ride may be rough, but it is also nearly
always guaranteed. This brings us to Wells Fargo 3rd quarter earnings
report and their "record" earnings. As a quick recap of where I am
coming from re: Wells then on to a review of their Q3-09 results...
- Doo-Doo bank drill down, part 1 - Wells Fargo - I introduce Wells as a founding member of the Doo Doo 32 list of banks to encounter distress in the Spring of 2008. Here
I was the first to introduce the blogoshpere to Wells extremely
aggressive accounting games, namely extending the definition of the
term delinquent in order to hide HELOC losses! - The open source mortgage default model
I released an open source spreadsheet that detailed defualts in almost
all states sourced from independent government sources. Apply these
loss rates to Wells portfolio and the truth is evident. - Fact, Fiction, Farce and Lies! What happened to the Bank Bears?
I attempted to stress the difference between economic and accounting
losses. Yes, Wells has "record" accounting profits, but also has record
economic losses as well. - Beware of Bank Earnings Propaganda - They are still in BIG trouble!- self explanatory
- Wells Fargo reports in a few hours and I wonder how forthcoming they will be with their credit losses
- Wells Fargo Q2 2008 Highlights
- Green Shoots are Being Fertilized by Brown Turds in the Mortgage Markets
Subscriber links with the real heavy analysis can be found at the end of this article.
Reggie Middleton on Wells Fargo's 3Q09 Reported Performance
Wells
Fargo & Co. (WFC) reported "higher-than-expected earnings" for
3Q-09, beating consensus estimates for the second time in a row,
primarily on the back of increased revenues from mortgage banking.
Although WFC's reported EPS at $0.56 was up 14.0% y-o-y it declined
2.0% q-o-q in 3Q09. A y-o-y growth in earnings reflected strong growth
in non-interest income (up 169.8% y-o-y) and net interest income (up
83.1% y-o-y) led by higher customer base and increase in product
offerings to its existing customers, partially offset by increased
provisions for credit losses (up 144.9% y-o-y and 20.2% q-o-q), during
the same period. Excluding the impact of gains from mortgage servicing
rights (MSR) which constitute part of non-interest income, the
Company's earnings deteriorated on a consecutive q-o-q basis. The
contracting base of interest earning assets (q-on-q) along with higher
loan losses provides a significant headwind to the company’s valuation
in the near-term.
In
3Q 09 WFCs' net charge-offs increased to $5.1 billion, or 2.5% of
average loans, (up 156.2% y-o-y and 16.5% q-o-q), primarily due to
higher charge-offs from Wachovia's loan portfolio which contributed
33.8% to total net charge-offs. Wachovia's net charge-off rate
situation deteriorated sharply to reach 1.66% in 3Q09 from 0.92% in
2Q09 while WFC's legacy loan portfolio charge-off rate rose 2 basis
points to 3.37% in 3Q09 from 3.35% in 2Q09. Further, non-performing
assets also rose 27.9% q-o-q to $23.5 billion as of September 30, 2009,
or 2.9% of total loans, reflecting deterioration in the Company's
consumer loans and Wachovia's commercial and commercial real estate
non-accrual loans.
Click to expand
The
major support for WFC came with mortgage banking revenues increasing to
$3.1 billion (up 243.8% y-o-y), representing 13.7% of the total
consolidated revenues in 3Q09 compared with 8.6% in 3Q08. Out of total
mortgage banking revenues reported in 3Q09, $1.5 billion were related
mortgage servicing rights (MSRs) which are "non-recurring"-
as in a one trick pony!!! Please do remember the propensity for Wells
to get aggressive with their accounting, as mentioned in the
afore-referenced bullet list above.. Excluding
the impact of MSR, the Bank's non-interest income contracted 4.7% q-o-q
to $9.3 billion in 3Q09 as compared to $9.7 billion in 2Q09. In 3Q09,
non-interest revenues (including MSR) accounted for 48.0% of the total
net revenues against 47.7% in 2Q09 and 38.5% in 3Q08.
More
importantly, net interest income declined 0.7% q-o-q to $11.7 billion
in 3Q09 from $11.8 billion in 2Q09 despite 0.06% increase in net
interest margin off lower average earning assets in 3Q09. Further, net
interest margin declined to 4.36% in 3Q09 from 4.79% in 3Q08 as decline
in yield on interest bearing liabilities exceed the decline in yield on
interest earning assets.
Net
income to common shareholders reached $2.6 billion (increasing 2.4%
q-o-q in 3Q-09) primarily off higher mortgage banking revenues (which
included $1.5 billion gains from MSRs and hedging gains in 3Q09 versus
$1.0 billion in 2Q09), lower non-interest expenses over 2Q09 off FDIC
charge of around $565 million in 2Q09 and decline in tax rate of 2.0%. Excluding
the impact of gains from mortgage services rights recorded in 3Q09 and
2Q09 and FDIC charge off recorded in 2Q09, net income in 3Q09 declined
47.7% to $1.1 billion from $2.2 billion in 2Q09.
Diluted
EPS in 3Q09 was $0.56 per share against $0.57 per share in 2Q09 and
$0.49 in 3Q08. Excluding gains from MSRs and FDIC charge-off, the WFCs'
operations portray a very dismal performance - indicates declining loan
base, increasing loan losses and reduction in asset yields.
The
tough credit environment and decline in loan demands contracted the
total interest earning assets in 3Q09. WFCs' total loan portfolio
contracted 2.6% q-o-q to $800.0 billion in 3Q09.
Click to expand
In
3Q09, provision for loans losses and net charge-offs increased
significantly to $6.1 billion or (3.06% of total loans), up 20.2%
q-o-q; and $5.1 billion (2.48% of total loans), 16.5% q-o-q,
respectively. Total non-performing assets (NPAs) also increased to
$23.5 billion (2.93% of total loans) from $18.3 billion (2.23% of total
loans) at the end of 2Q09 and $6.3 billion (1.53% of total loans) at
the end of 3Q08. The growth in NPAs was driven by Wachovia with
weakness in commercial, CRE, and mortgage. Here I introduce you to
another "I told'ja so" starting as far back as September of 2007:
- Will the commercial real estate market fall? Of course it will.
- Do you remember when I said Commercial Real Estate was sure to fall?
- The Commercial Real Estate Crash Cometh, and I know who is leading the way!
The
allowance for credit losses summed $24.5 billion or (3.1% of total
loans) in 3Q9, as compared to $23.5 billion or (2.9% of total loans) in
2Q09. An increase in $1.0 billion credit reserve was estimated by the
management as inherent losses on its portfolio as of 3Q09, particularly
from commercial loan portfolio. Further, loans 90 days or more past due
and still accruing increased to $18.9 billion, or 2.4% of total loans,
in 3Q09 as compared to $16.7 billion, 2.0% of total loans in 2Q09. The
Banks Texas ratio also worsened to 32.5% in 3Q09 compared with 29.9% in
2Q09 and 20.7% in 3Q08.
In closing, and in
short on WFC, I told you so. Many times, and these days, most of the
time, the economic truth is not reflected share prices, CNBC nor
accounting numbers. You can be sure to get the unbiased record from
your buddy Reggie, though. So as to not simply pick on Wells, JP
Morgan, this country's most respected bank, is really in the same
position save a trading arm that had artificially high margins that are
already on the decline (I will post an article on FICC risks and
revenues next). See "Reggie Middleton on JP Morgan's Q309 results" and "If a Bubble Bubble Bursts Off Balance Sheet, Will Anyone Be There to Hear It?: Pt 2 - JP Morgan, then download:
More rabble rousing links of interest:
- The Fed Believes Secrecy is in Our Best Interests. Here are Some of the Secrets
- Why Doesn't the Media Take a Truly Independent, Unbiased Look at the Big Banks in the US?
- As the markets climb on top of one big, incestuous pool of concentrated risk...
- Any objective review shows that the big banks are simply too big for the safety of this country
- The ARE trying to kick the bad mortgages down the road, here's proof!
- Why hasn't anybody questioned those rosy stress test results now that the facts have played out?
Wells Fargo Subscription Content
WFC Off Balance Sheet Exposure 2009-10-19 04:11:50 259.25 Kb - The complete off balance sheet review
WFC Research Note Sep 2009 2009-09-30 13:01:30 281.29 Kb - The Skinny on that CDS exposure. Are they doing the AIG thing too???
WFC Full Forensic Analysis & Research Note 22 May 09 - Retail 2009-05-27 01:55:50 554.15 Kb
WFC
Full Forensic Analysis & Research Note with Anticipated Capital
Requirements under revised SCAP/Stress testing 22 May 09 - Professional 2009-05-27 01:56:54 853.53 Kb This
is the document that ties all of the ancillary research togther and
includes our best estimate as to the amount of capital Wells Fargo will
need to raise!
- advertisements -
The naive fool that I am, I remember just one year ago, when bank panic was endemic, I put $50K into a six-month CD at Wells Fargo because, hey, they were on the list of the World's Eight Safest Banks! (No I don't remember the other banks on the list.) No sooner did I park my cash than I read that WF was buying Wachovia. Was this the behavior I expected from one of the World's Eight Safest Banks? Um, not really! These days I use banks that are so small and obscure, even a semi-bankrupt FDIC should be able to take them over when necessary.
Now thats real economic reporting!!!!
fuzzy math---what fuzzzy math.................
nice work Reggie
and yes they R a piece of crap--all of them.
Reggie said: "I believe I provide uncommon analysis"
That's an understatement. And you do it well. I've become a big fan, and really appreciate this info, especially since I can't get it anywhere else.
fundamentals are in my view the only way to invest - i don't consider trading investing....when you can recognize value - especially undervalue - you can bank those buys for a big win....
the government overrides fundamentals in numerous ways so it will take time to revert to the mean so to speak....but it will happen....not when we want but when the market is ready it will surely happen....now is the time to position for that reversion...and my guess is that the market will over correct in a big way....
what was that newtonian principle again about action and reaction?
Reggie: Completely respect your work and have read you before your affiliation here. BUT, let's be honest about the eventually returning to the fundamentals I too am a fundamentalist, as I work in risk managment and review fundamentals for a living. We need to define "eventually" here before we go any further. As far as I see, the US is so screwed up that the government just might need to be involved in the rule breaking in perpetuity, or else we fail. I will continue to use fundamental anaysis here at work, but as for my investing...I think not. One thing I have learned is do not tarde ahead of the freight train known as the Federal Governemtn. They wil run you over, back up and do it again, all to prove a point. Even if they lose money doing it. Now, as a fundametalist, I just can't buy into the bullshit anymore, but also no longer trying to short it. Atleast I can sleep at night.......
Keep up the good work.
Fundementals allways have and allways will matter. They must if semi-efficient capital markets are to exist for realistic intervals. Right now is not one of those intervals.
It will take some time before the level of government & central bank intervention as well as robo trading influence can be studied long enough for these variables to be quantified and used in a way to incorporate them into the study of "fundementals"
"Eventually" in my humble estimate is at least 12 to 18 months away.
Fundamentals still matter, but you need to include the "QE fundamental" and ".25% interest rate fundamental" and "bailout fundamental".
In other news: Amazon is up 20% today on fundamentals. They smashed the 1999 highs becasue they have this new technology that lets people read books using electronic 'lasers'.
reggie.
nice job.
wfc is a piece of crap.
looking forward to implementation of fasb 166/7.
anybody out there got mw's stuff on wfc? i'll be that is a doozy.