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The Wells Fargo 4th Quarter Review is Available, and It Ain't Pretty!
I have decided to release a significant amount of opinion on Wells to
the public, and have created an extended version of the report for
subscribers with geo-specific charge-off estimates stemming from the
FDIC/NY Fed model that we have created in house. A rather comprehensive
piece of work. It appears that much of the sell side community is much,
much more optimistic on the prospect of Wells than I am. It must be the
Warren Buffet investment...
In short:
Total revenues of Wells Fargo in 4Q09 increased 1.0% primarily coming
from increased non interest income from mortgage banking and realized
gains on debt securities as well as other trading activities. The
interest income was down 2.0% (q-o-q) owing to reduced interest earning
assets. Loans declined nearly 2.1% or $17.1 billion and the securities
AFS (primarily MBS) declined 6.0% or $11.1 billion. The interest expense
declined by 4.0% offsetting some of the decline in interest income. Net
interest income declined 1.6% to $11.5 billion in 4Q09 from $11.7
billion in 3Q09. Non interest income increased 3.8% to $11.2 billion in
4Q09 from $10.8 billion in 3Q09 primarily owing to increase in mortgage
banking income, net gains on debt securities and net gains on trading
activities by $344 million, $244 million and $150 million,
respectively. Mortgage banking income increased largely due to changes
in the fair value of MSR (Mortgage Servicing Rights - a level 3
derivative with valuation derived by management opinion from non-market
inputs). Thus, the increase in non interest income was largely
driven by trading gains and changes in fair value due to changes in
assumptions in valuation models.
Provision for loan losses declined to
$5.9 billion in 4Q09 from $6.1 billion in 3Q09 while
the total net charge-offs increased to $5.4 billion in 4Q09 from
$5.1 billion in 3Q09. The increase in charge-offs primarily came
from commercial real estate while the charge-offs of the residential
mortgage increased marginally. All readers are welcome to
download my CRE
2010 Overview in order to see where this is going. The
nonperforming assets increased from $23.4 billion in 3Q09 to $27.6
billion in 4Q09 with non accrual loans increasing from $20.9 billion to
$24.4 billion. The increase primarily came from a) residential
mortgage where non accrual loans increased $2.2 billion and b)
commercial mortgage where non accrual loans increased $1.4 billion. While
the NPAs increased substantially in 4Q09, the allowance for loan losses
increased marginally from $24.5 billion to $25.0 billion.
Non interest expense increased to $12.8 billion in 4Q09 from $11.7
billion in 3Q09 primarily from higher Wachovia merger integration and
severance expense and expense on ARS settlement. Net income was down
9.1% to $3.0 billion in 4Q09 from $3.3 billion in 3Q09. WFC charged
nearly $2.4 billion in preference dividends in 4Q09 out of which $1.9
billion was deemed the dividend upon redemption of TARP preferred stock.
The net income available to common shareholders was $394 million
against $2.6 billion in 3Q09.
Reggie Middleton's Take
The bursting of the massive real estate bubble and associated Asset
Securitization Crisis has seriously impaired the US financial
system. US banks' profitability and solvency will continue to be
threatened until their balance sheets are purged of the loan losses by
writing down the portfolio to the realizable value. This value is
currently, in our opinion, on a continuous downward trend, contrary to
the opinion of many analysts, consultants and pundits. As pointed out in
the CRE
2010 Overview and my blog posts as far back as 2007, commercial
real estate (CRE) is the next major crisis brewing due to the inability
to rollover underwater debt and the signs of the same have started to
emerge in the banks' books. This, coupled with continuing losses from
the rolling losses across various classes of debt in the residential
space and weak consumer lending and associated non-performing assets,
underlines the huge risk attached to the sector and undermines any
investment proposition.
The credit quality of WFC loan portfolio
Credit conditions continue to deteriorate as the delinquency rates
continue to climb and the nonperforming assets continue to increase. Total
nonaccrual loans increased 17.0% (q-o-q) to $24.4 billion or 3.34% of
total loans* at the end of 4Q09 from $20.9 billion (2.8% of total
loans*) at the end of 3Q09. Non accrual loans in commercial real estate
increased 25.9% (q-o-q) to $7.0 billion in 4Q09 (5.6% of loans*) from
$5.6 billion (4.5% of loans*) in 3Q09. The non accrual loans in
residential real estate increased 22.2% (q-o-q) to $12.4 billion in 4Q09
(4.2% of loans*) from $10.1 billion (3.4% of loans*) in 3Q09. The
increase in non accrual loans in residential mortgage came primarily
from in residential first lien with nearly 53% of the total increase in
the segment coming from Pick-a-Pay (mainly Option ARM) portfolio
acquired from Wachovia. Total non performing assets increased 17.9%
(q-o-q) to $27.6 billion (3.78% of total loans*) from $23.4 billion
(3.15% of total loans*) at the end of 3Q09.
Loans 90 days or more past due and still accruing increased 13.9%
(q-o-q) to $6.8 billion in 4Q09 from $6.0 billion in 3Q09 with q-o-q
increase in commercial real estate and residential real estate at 18.5%
and 5.0%, respectively.
There is 27 pages of Wells Fargo Q4 opinion and analysis awaiting those
who are interested. Subscribers also have access to geographic
charge-off analysis.
WFC 4Q09_Review 2010-01-26 05:37:52 1.32 Mb
WFC 4Q09_Review-
subscriber edition
2010-01-26 05:38:43 1.46 Mb
Morgan Stanley, Goldman Sachs and Suntrust are up next, then I will
extend my China short thesis (which is paying off handsomely as are the
MS and GS shorts) and I will finally released the Central European short
thesis - which should be a biggie.
- advertisements -
subscription worth every penny, only thing these people bidding bank shares need to vaporize one day for us to make some money.
lmfao at wfc
last time i thought about wfc i was taking a doodoo
wells still hasn't taken down the wachovia signage in my county. at least chase got banners up right quick on wamu, and signage followed. maybe wells wishes that bair's giveaway of wachovia to C transpired. wachovia probably still hadn't cleared out the crap from first union. WF and C are both epic fails. They will eventually kill the TBTF model. 'course the can will be kicked past the mid-term elections -- 2010 is a non-event; only thing that will happen is hanky panky will resign (lol).
Looks like WFC assigned somebody to your threads Reggie.
Keep up the great work.
p.s. MAC, lol!!
I have a 401k at wfc. I looked at what the money was invested in and they have a "money market" that is not even rated by Morningstar "it is a collection of investments" stated the guy on the phone. I moved it to a named and rated fund...still scares the pi** out of me.
Government guarantees destroyed free markets.
In turn that wrecks what made America great.
One of the biggest cheerleaders for bailouts
and 0 was the biggest owner of BRK and WFC
who apparently thinks FDR saved America
instead of implementing the Socialist agenda
of strong central powers, high taxes and
world war.
Both BRK and WFC with special tax credits may
be headed down after the lemmings rush in,
overcome by moral hazard.
Time will tell...
http://www.jubileeprosperity.com/
jubilee prosperity is garbage
Wells will be fine, it has a large and growing deposits base. While I'm not qualified to pass judgement whether their stock is worth 28-29, I simply trade what I see. Maybe their stock is worth 10, maybe 45, only further price action will show and that is what you have to trade, not some preconceived opinion of fundamentals. If the market disagrees with you, tough.
From my understanding, FED has a lot of asset guarantee programs, so effectively they act as a backstop for losses on mortgage and asset-backed securities up to some haircut (some had 80, 90 and 95 cents on the dollar.) And if FED will honor these obligations (most likely they will,) the assets should be priced at the maximum haircut and not based on the assumptions of credit degredation.
This was a brainf**k for me to get over, but I did. And I think this is what the market believes to be true.
Reggie is right on about commercial real estate being the next explosion . More than 380 billion due for refinancing by 2011 . AIG was only 160 billion bomb. Just imagine new evaluations and impact on balance sheets ala Stuyvasant
Wachovia (especially its Golden West acquisition) are the anchor around Well's neck.
All you need to know to assess Wells Fargo's true condition is the fact that they have not yet repaid their TARP loan, after saying long and loud that they didn't need or want it.
What are you smoking?
WFC repaid TARP after BAC but before C in Nov/Dec.
Lets clean it up people. Facts straight.
Wachovia (especially its Golden West acquisition) are the anchor around Well's neck.
All you need to know to access Wells Fargo's true condition is the fact that they have not yet repaid their TARP loan, after saying long and lound that they didn't need or want it.
How bout they be renigging on sarbox. their numbers are worse than shown and every mortgage originator knows it.
I agree with the JUGGERNAUT guy.
So they have 5-6 Qs in loan loss reserves at current loss rates? And why do they need more than that?
Look like NPA and charge-offs basically flat-lined. Next Q I bet you see the first drop and then it gets rapid from there.
At some point the $6B/q in loss reserve additions goes away and drops straight to EPS, =+24B pretax, +16B post tax. At the same point, loan growth restarts. This will take the stock back to 40-50 range.
Buy low, sell high. We're still in the trough.
at some point cash flow meets FASB 157.
also, at some point (1.5 yrs) FASB 166/167 must be addressed.
i won't bore you with the minor issues of first and second lien residential or the cds mess of wachovia.
Excellent analysis and article.
What is keeping the big bank stocks (and the entire market, for that matter) in the upper reaches of the atmosphere?
Is the market still in radio contact with Earth?
Just asking.
i don't know what is behind the WFC curtain, but i don't see that you've found any smoking guns here. this isn't analysis; it's a bunch of numbers regurgitated. what might be meaningful is if you found that 3.34% of loans as nonaccruing (i.e. what WFC reported) was materially lower than the percent of loans in the US that could be defined as such. how do they rank? are you really claiming, as one of your damning pieces of evidence, that a level III asset showed a MTM gain in a quarter during which the S&P was up 10%? you should be suspicious if it didn't! in the meantime, and as long as the goverment wills it, WFC will print gobs of money via the steep yield curve and earn its way out of its AFS vs MTM accounting gap.
It seems Wachovia gave a $ 3 billion mortgage towards the Stuyvesant / Cooper Village disaster in NYC. How is the latest BlackRock (Bob Doll = S&P 1250 fame) & Tishman default playing out on the Wachovia / Wells Fargo balance sheets ?
This is amateur hour analysis, lots of numbers, no insight. Where is the 'so what' of this analysis? ZH is diluting its otherwise very insightful pages with this guy's work.
Lets see you do better Mr. Pupkin
Notice how no one is jumping in to 'second' your assessment of the quality of the insight contained in the analysis?
yadehdah, yadehdah, yadehdah. I worked for WFC in late 80's, the last time the street was calling for C11. They were wrong then, and their wrong now. It's amazing how being able to borrow at 0% and invest in anything above 0% - especially at zero risk weighting - can repair even the worst balance sheet. WFC is a juggernaut that churns out earnings, and thanks to hank Paulson, now has fewer competitors. This guy just doesn't get the meaning of the word M-O-N-O-P-O-L-Y.
Late 80's??? You are talking a different planet and a different dimension.
And that was before they swallowed the Wachovia pick-a-pay portfolio - strap on the cement blocks and go for a swim in deep freezing water.
I have to agree that with Countrywide out of the way, they have a big chunk of the (a rapidly shrinking) market share.
hey, there was no credit collapse or shrinkage back in the 80's. Yes there was massive trouble with commercial real estate and took quite sometime to correct but this time is different. The combination of the lost tax revenue plus the increase of pay for public workers plus their pensions will start some form of class warefare or worse in the next few years or less. We are also in a deflationary cycle which is not going away anytime soon. Good luck
Hey Reggie...first, you rock. Any chance you do analysis/writings on some of the smaller banks, e.g. Huntington Bancshares, Regions, Zion, Private Bancorp, etc etc????
As usual your analysis is spot on when it comes to
the banking, insurance and real estate space. Thanks
for the forensic work much appreciated. Finding a
naked long in the aforementioned crowd is a tricky
business at best...
by the way, Meredith, what do you think about WFC? Presumably you are still as bearish as ever?
I know you're reading this and still hope we hear about that lunch with Sheila.
Thank you Reggie will look forward to Suntrust.
They are not big enough to be TBTF but are too
large for Sheila to eat. It will be a terrific case,
what the hell are they going to do with it? LOL.
For the last few days, someone is aggressively buying WFC. The pattern of trading and the devil-may-care attitude about price suggests it is one person.
What do they NOT know that Reggie knows? California has recovered but it didn't make the papers?
California recovered ?? You mean WFC's home state ??
Take a gander at this.
www.doctorhousingbubble.com
Thanks very much Reggie.
Once again, FASB FAS 157 menagerie saves WFC's ass. Someone sure is keeping a bid under WFC, that is for certain.
Looking forward to your take on ZION also if you cover it.
Great headline. Shock 'n awful.
WFC is crying for $$$ and good loans -- we received a cold-call from them to refinance our mortgage. Mortgage is not with them currently, so they're obviously trying to bring in outside paper to prop up their own crap.