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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Sun, 01/17/2016 - 17:46 | 7059216 HedgeAccordingly
Sun, 01/17/2016 - 17:48 | 7059239 remain calm
remain calm's picture

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

Sun, 01/17/2016 - 17:49 | 7059249 Looney
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. ;-)


Sun, 01/17/2016 - 18:11 | 7059341 Freddie
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.

Sun, 01/17/2016 - 18:18 | 7059375 SoilMyselfRotten
SoilMyselfRotten's picture

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

Sun, 01/17/2016 - 19:13 | 7059555 Babaloo
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.


Sun, 01/17/2016 - 19:56 | 7059713 FMR Bankster
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.

Sun, 01/17/2016 - 20:09 | 7059757 Handful of Dust
Handful of Dust's picture

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

Sun, 01/17/2016 - 20:55 | 7059937 johngaltfla
johngaltfla's picture

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

Sun, 01/17/2016 - 20:25 | 7059827 jerry_theking_lawler
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...

Sun, 01/17/2016 - 21:42 | 7060113 Antifaschistische
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

Sun, 01/17/2016 - 18:46 | 7059468 Fester
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

Sun, 01/17/2016 - 22:56 | 7060357 Boris Badenov
Boris Badenov's picture

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

Sun, 01/17/2016 - 22:24 | 7060248 e_goldstein
e_goldstein's picture

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

 Wearing a lead necklace and cement shoes.

Sun, 01/17/2016 - 17:50 | 7059253 Cognitive Dissonance
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.

Sun, 01/17/2016 - 20:21 | 7059808 azusgm
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.

Sun, 01/17/2016 - 19:05 | 7059525 junction
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.

Sun, 01/17/2016 - 17:50 | 7059252 knukles
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.

Sun, 01/17/2016 - 18:03 | 7059306 Enki Anu
Enki Anu's picture

Wake me up when Banks stop lending to each other,

Sun, 01/17/2016 - 17:43 | 7059218 ebworthen
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.

Sun, 01/17/2016 - 17:47 | 7059237 Truther
Truther's picture

Nail the fucking CEO as a trophie too.

Sun, 01/17/2016 - 17:42 | 7059221 Truther
Truther's picture

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

Sun, 01/17/2016 - 19:00 | 7059503 gatorengineer
gatorengineer's picture

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

Sun, 01/17/2016 - 19:28 | 7059608 boattrash
boattrash's picture

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

Sun, 01/17/2016 - 20:23 | 7059820 azusgm
azusgm's picture

Bless you, Mr. Trash.

Sun, 01/17/2016 - 20:46 | 7059911 boattrash
boattrash's picture

Sincere Thanks, BT

Sun, 01/17/2016 - 23:37 | 7060481 Implied Violins
Implied Violins's picture

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

Mon, 01/18/2016 - 12:49 | 7061811 boattrash
boattrash's picture

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

Sun, 01/17/2016 - 17:42 | 7059224 Bill of Rights
Bill of Rights's picture

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

Sun, 01/17/2016 - 17:44 | 7059226 Spiritof42
Spiritof42's picture

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

Sun, 01/17/2016 - 17:46 | 7059233 Soul Glow
Soul Glow's picture

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

Sun, 01/17/2016 - 17:52 | 7059263 Spiritof42
Spiritof42's picture

That's when they start the bail-ins.

Sun, 01/17/2016 - 18:14 | 7059356 buzzsaw99
buzzsaw99's picture

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

Sun, 01/17/2016 - 20:27 | 7059834 jerry_theking_lawler
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....

Sun, 01/17/2016 - 17:44 | 7059227 Soul Glow
Soul Glow's picture

Wells Fargo is fine!  They're fiiine!

Sun, 01/17/2016 - 18:27 | 7059401 seabiscuit
seabiscuit's picture

Nothing to see here, move along.

Sun, 01/17/2016 - 18:40 | 7059447 Berspankme
Berspankme's picture

Well they did buy all that GE Capital crapola

Sun, 01/17/2016 - 17:48 | 7059240 smokintoad
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.

Sun, 01/17/2016 - 17:49 | 7059246 buzzsaw99
buzzsaw99's picture

those maggots never lose. take another bonus assholes.

Sun, 01/17/2016 - 17:52 | 7059264 knukles
knukles's picture

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

Sun, 01/17/2016 - 17:58 | 7059286 northern vigor
northern vigor's picture

I heard she is phucking goofy

Sun, 01/17/2016 - 18:17 | 7059363 bamawatson
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

Sun, 01/17/2016 - 17:53 | 7059265 frankly scarlet
frankly scarlet's picture

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

Sun, 01/17/2016 - 20:59 | 7059958 Helena Bonham-Carter
Helena Bonham-Carter's picture

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

Mon, 01/18/2016 - 19:36 | 7064097 jcdenton
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!

Sun, 01/17/2016 - 17:53 | 7059266 Latitude25
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?

Sun, 01/17/2016 - 17:58 | 7059285 Seasmoke
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. 

Sun, 01/17/2016 - 18:18 | 7059373 Freddie
Freddie's picture

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

Sun, 01/17/2016 - 18:24 | 7059394 Blythes Master
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.

Sun, 01/17/2016 - 22:28 | 7060258 e_goldstein
e_goldstein's picture

Bravo, BM. Just fucking bravo.

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