Wells Fargo's Problem Emerges: $17 Billion In Junk Energy Exposure

Tyler Durden's picture

When Wells Fargo reported its Q4 earnings last week, the one topic analysts and investors wanted much more clarity on, was the bank's exposure to oil and gas loans, and much more color on its energy book over concerns that Wells, like most of its peers, was underestimating the severity of the upcoming shale default wave.

And while the company's earnings call indeed reveals that things are deteriorating rapidly in Wells energy book, perhaps an even bigger concern for Wells investors, which just happens to be the largest US mortgage lender, should be what is going on with its mortgage book. The answer: nothing. In fact, at $64 billion in mortgage applications in the quarter, this was not only a major drop from Q3, but also the lowest since the first quarter of 2014.


Needless to say, without significant growth in Wells' mortgage pipeline and originations, there can be no upside to Wells Fargo stock, meanwhile one can kiss the so-called housing recovery goodbye for the final time, because now that the US Treasury is cracking down on criminal and money laundering "all cash" buyers, we fully expect the housing industry to grind to a near halt in the coming 2-3 quarters.

That covers the lack of upside. As for the substantial downside, here are the key parts from Wells Fargo's conference call discussing the bank's energy exposure.

First: how big is Wells' loan loss allowance for energy:

We've considered the challenges within the energy sector and our allowance process throughout 2015 and approximately $1.2 billion of the allowance was allocated to our oil and gas portfolio. It's important to note that the entire allowance is available to absorb credit losses inherent in the total loan portfolio.

Then, from the Q&A, how much is Wells' total loan exposure, its fixed income and equity exposure toward energy:

I would use $17 billion as outstandings  for energy loans. And for securities, I would use, call it, $2.5 billion which is the sum of AFS securities and non-marketable securities.

In other words, a 7% loan loss reserve toward energy, perhaps the highest on all of Wall Street.

Then, here is the breakdown by services:

We're focused on the whole thing. Half of  those customers - half of those balances represent E&P companies, upstream companies. A quarter of them represent oilfield services companies, and a  quarter of them represent pipelines and storage and other midstream activity. And it excludes what I would describe as investment grade sort of diversified larger cap companies where we don't view the credit exposure as quite the same.

But the "downside risk" punchline was the following exchange with Mike Mayo:

<Q - Mike L. Mayo>: What percent of the $17 billion is not investment grade?


<A - John R. Shrewsberry>: I would say most of it. Most of it.


<Q - Mike L. Mayo>: So most of the $17 billion is non-investment grade.


<A - John R. Shrewsberry>: Correct.

To summarize: $17 billion in oil and energy exposure, which has a modest $1.2 billion, or 7%, loss reserve assigned to it (the highest on the street mind you), and which is made up "mostly" of junk bonds.

Why could the be concerning? Well, one reason is that junk yields just surpassed the all time highs set just after the Lehman bankruptcy.

In retrospect we can see why the Dallas Fed told banks to stop marking assets to market.

As for Wells, Warren Buffett may want to take another bath in the coming days.

Source: Wells Fargo Q4, 2015 Conference Call

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remain calm's picture

Tick Tock Tick Tock..... Oh FUCK........BOOM

Looney's picture

As for Wells, Warren Buffett may want to take another bath in the coming days.

He should take an eternal dip in that bath. ;-)


Freddie's picture

$17 B is a big number.  Hopefully Buffett will get those junk bonds shoved up his ass.  I am sure he will get bailed out.

SoilMyselfRotten's picture

For all we know big bets have already been made by these guys on the further demise of the markets

Babaloo's picture

Let'a see, is it really a "big number (?)"

17 billion divided by 1.8 trillion in assets.  Even ZH'ers can do that math.

Less than one percent.

I don't think that alone is gonna take down the bank.


FMR Bankster's picture

That's my thinking. Not great but no big deal. Strong credits go to the bond market, smaller companies with lower credit ratings borrow from banks.

Handful of Dust's picture

Luckily, under the revised accounting rulles, debt is an asset!

johngaltfla's picture

THAT is a crash initiating number if the ChiComs can not save our ass in the next 36 plus hours..

jerry_theking_lawler's picture

Do you even understand banking? Those 'assets' are leveraged. This means that the 17 billion, if it was all unwound, would turn into a massive number due to deleveraging/dehedging/deeverything. That is what will take down the banks...

Antifaschistische's picture

WF's exposure to the "mortgage" crisis was siginificantly larger.  I have a "friend of a friend" who was deep inside the california mortgage world who 9 years ago said there was no way WF survives the mortgage disaster.   but somehow, they get miraculously saved with all the problems swept under the rug..

....will this time be the same?

...there is a difference.  Obama hates the south and everyone in the oil industry...he has Bush Envy

Fester's picture

Grand Pa Buffet needs to play the senior card:

Where am I

What's my name

Can I have some ice cream

I just pooped my pants

Boris Badenov's picture

Maybe Sanders picks Warren as his running mate! How funny would that be?

e_goldstein's picture

 He should take an eternal dip in that bath. ;-)

 Wearing a lead necklace and cement shoes.

Cognitive Dissonance's picture

Well.....there is junk and then there is JUNK. Give it a few more weeks and the junk will become JUNK.

azusgm's picture

Kind of depends on the collateral. Sure the assets are sliding in value. However, I'm still receiving cold call offers in the mail to buy my minerals. A good leasehold can be a thing of beauty, especially if there is war and crude oil and refined products become difficult to ship.

Remember: the oil business is boom and bust. The nat gas business is more so.

junction's picture

The obvious solution is to have the FDIC insure insure Wells Fargo's soon to be non-performing loans.  Afer all, Bank of America dumped 22 trillion dollars worth of worthless derivatives on the FDIC in 2011.   http://seekingalpha.com/article/301260-bank-of-america-dumps-75-trillion...

Wells Fargo should have no problem following Bank of America's example.  Anything goes with the Wizard of Obama in charge.

knukles's picture

So Happy Memsahib can now say that everything's gone wrong because of the Saudis, right?
Well, I mean He and the Democrats are certainly going to need somebody to bash, big time!
The Saudis!!!!!   Fits right in there with everything else he's doing; Iran, Israel, pipelines, etc.

Enki Anu's picture

Wake me up when Banks stop lending to each other,

ebworthen's picture

Fucking bailout flunkies; send the horses to the glue factory, the stage coach to the wood pile, and the drivers to the gallows.

Truther's picture

Nail the fucking CEO as a trophie too.

Truther's picture

Hang the Wells Fargo criminals. Hang the fucking bankers already. It 's starting to crack big time.

gatorengineer's picture

Maybe not yet, but soon, time to go long ROPE.

boattrash's picture

Wheeeeew! All I have invested in oil is a career.

Implied Violins's picture

Just diversify into boiling oil and tar. It's gonna be a big hit, and very soon.

boattrash's picture

...over a wood fire also, I love it.

Bill of Rights's picture

The interest the Feds are paying the bank should cover it...

Spiritof42's picture
Spiritof42 (not verified) Jan 17, 2016 5:44 PM

What's the problem? All they have to do is make up some numbers so their balance sheet looks good again.

Soul Glow's picture

People find out when the treasury runs dry when the king can't pay for his own funeral.

Spiritof42's picture
Spiritof42 (not verified) Soul Glow Jan 17, 2016 5:52 PM

That's when they start the bail-ins.

buzzsaw99's picture

yep. reduce the liabilities side to zero and they'll be right as rain.

jerry_theking_lawler's picture

This is why the .fed ran over to the banks on Friday and told them to stop Mark-to-Market....go back to Mark-to-Model. This will tide them over for awhile until the cash flows stop coming in completely....

Soul Glow's picture

Wells Fargo is fine!  They're fiiine!

seabiscuit's picture

Nothing to see here, move along.

Berspankme's picture

Well they did buy all that GE Capital crapola

smokintoad's picture

Most of it being closer to 51% or closer to 99% ?   Probably doesn't matter as long as there are enough deck chairs for everyone.

buzzsaw99's picture

those maggots never lose. take another bonus assholes.

knukles's picture

Next thing you know, Minne Mouse is gonna have the clap.  Oh, the humanity of it all!

northern vigor's picture

I heard she is phucking goofy

bamawatson's picture

hey man, each of us has a singular style; do not make fun of the way she fucks; that's personal. like they said about william jefferson milhouse blythe clinton.... private life

frankly scarlet's picture

if the admission is to 17 B then the true value is anywhere from 100 to 170 B....

Helena Bonham-Carter's picture

...and the notional of all ye derivatives be $17 trillion.

jcdenton's picture

Someone is paying attention here ..

This gets down to the derivatives are unraveling. See Bill Holter and Jim Sinclair ..

How do we know derivatives are blowing up?  Simply because the Dallas Fed has given their banks permission not to mark energy debt to market.



As Holter previously herald -- Margin Call!

Latitude25's picture

I just pulled out all cash from WF last week leaving only a bare minimum to pay bills.  I heard they were on the hook about a week ago but no numbers were given.  $17 B in junk exposure.  How much is considered "not junk" by some idiot/liar who rates this stuff?

Seasmoke's picture

The WF branch did everything short of saying fuck you to her face, when she withdrew $15,000 a few months ago. They didn't want that cash leaving the building. 

Freddie's picture

They don't appear to hire any whites at Wells Fargo.

Blythes Master's picture

Yeah, my WF FA turned into a whiney cunt when we liquidated our portfolio and moved to all cash a few years ago.

Last year when we finally took the happy gilmore check out the door, he imploded and had a meltdown.

I sent him a nailgun for xmas and told him that he knows what to do with it.

I fucking hate bankster cunts.

e_goldstein's picture

Bravo, BM. Just fucking bravo.