Wells Fargo's Problem Emerges: $17 Billion In Junk Energy Exposure
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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Fuck You John Stumpf. You stole my townhouse with fraudulent backdated robobosigned BULLSHIT. I will never forget. I look forward to your demise.
Yeah well JPM tried to confiscate my house that I fully paid for with cash in 2009. Whoops, cash buying a house now means I'm a criminal. FBI visit coming in 3...2...1
I paid for 10 years straight. Never late. These fuckers come in as nothing more than scumbag servicer about 7 years in. I did fall behind on property taxes that I paid directly. They jumped me. Paid them. Gave me escrow and basically doubled my mortgage. Only problem was I paid 1Q so there balance was wrong. Fought the good Fight for 5 years but eventually lost. What I learned since 2007 led me here to ZerHedge , which made nuclear even more. These are terrorists and criminals and the yellow belly Americans better wake the fuck up NOW !!!!!
Criminals indeed. Lying, thieving, bastards who will stop at nothing to squeeze a turnip. Hope it all ends in tears for them.
We as a nation will all be far better off when Wall Street and the TBTF banks are brought down and resemble a smoldering crater.
Did you learn the less I did? You don't own *shit*....it is leased to you and hopefully, if you are a good pleb, you can keep it while you are here. Soon as you are gone, its gone. Tragic.
Wanna fix it....create real 'property' laws where the property can't be taken with non-payment of taxes. Once you buy a property it is yours. This could easily be done versus taking property on tax seizures. This is what I currently hate now, more than anything else, the non-rights to my private property.
If I want more than $1,000 in cash I have to call ahead to my Credit Union goon to beg for permission to have so many federal reserve notes in my hand all at once. Somebody call out the freakin Calvery, he has CASH!
Peyton Manning's duck tosses are returning junk yields in the divisional field goal festival at Thai Stick High stadium.
The question is not why do they *only* have $1.2B set aside against their junk bond portfolio. The question is why do they keep any loan loss reserves at all? That $1.2B should be issued as executive bonuses this very fucking minute.
Warren Buffet is terrible.
How anybody could consider him as for "the people" in any sense, is beyond me. He is in it for himself, period.
IMO the only thing he cares about is being seen as a "shrewd investor." The money only matters to him as a means of keeping score.
He is the absolute fucking worst. And all of his apologists are totally ignorant Stockholm syndrome types.
I keep hitting the green arrow, but only one counted.
Not to counter narriative, but the same conf they said 90% is still "performing".
Counter that with the imminent oil glut added to the already here oil glut, the other 90% sure to be "non-performing"?
WFC admitted energy loans in this group is 2% of portfolio.
Don;t forget they bought into this - http://www.forbes.com/sites/halahtouryalai/2012/02/21/wells-fargo-nabs-9...
“I have never seen more opportunity than we have. We have grown deposits and relationships and cross-sell. We have fewer competitors now, and some of the ones we have are inwardly focused now. … And we punch above our fighting weight.”
Said Mike Johnson, head of Wells Fargo’s Corporate Banking Group, in a statement today, “The acquisition of this established and well-managed business is a unique opportunity for Wells Fargo to continue to grow its industry-leading energy banking business.”
Its interesting to note that Mr. Johnson no longer works there... http://www.wsj.com/articles/wells-fargo-corporate-banking-head-mike-john...
Long SUV's, plastics and big rigs.....
They should get back into laundering drug money. They did well in the arena. Fuck the corporate bs about ethics and crap. That is just a show piece.
Such as HSBC?
Advertising
Our global brand campaign
http://www.hsbc.com/about-hsbc/advertising
HSBC has form: remember Mexico and laundered drug money
http://www.theguardian.com/commentisfree/2015/feb/15/hsbc-has-form-mexic...
HSBC pays record $1.9bn fine to settle US money-laundering accusations
http://www.theguardian.com/business/2012/dec/11/hsbc-bank-us-money-laund...
Pardon my ignorance but If the HY Energy bond market is yielding 17 that's a 85 cent trade which implies over a 2x on the 7% loan loss wells is reserving! Even with adding a margin to this number their loan losses have already dwarfed their reserve. Poof.
Except that their overall reserve is much larger, but yeah - hopefully they are over-reserved in other sectors to compensate.
excuse my lack of knowledge but how do you get to 2X? - is it say 90% of $17B or $15.3B exposure on a loan loss reserve of 7% or $1.07B against $17 billion high yield loan balance should be $2B reserve based on yield of 17?
What do they care? Bailout for all!
Friendly old uncle Warren might be paying a visit to the History Museum this week. He will definitely not be 420 friendly. At least he can admire the gold nugget in the lobby on the way out and still know he has at least one actual asset he can seize in the bankruptcy. Unless they never replaced the one that was stolen or rehypothecated the new one.
So, how much will JPMorgan buy Wells Fargo for?
$2 bucks a share, or lower ?
Would that make any sense except to the FDIC? It would take quite a deal to get JPM to take WFC except maybe for the allure of market share. Since Dodd-Frank, derivatives are higher order claims than deposits.
Time for Buffett to buff some a$$ in DC.
$17billion? That's chump change for them - they probably have that much in their employee's coffee fund.
<=== Bail outs on Tuesday
<=== Bank runs on Tuesday
When I needed a life jacket - Wells Fargo threw me an anchor. As far as I am concerned I hope Wells Fargo gets ground into the ground like a Stumpf.
Paging the Orfice of Omaha
I would assume any debt has been resold/rehypothecated several thousand times so that the true exposure is huge-assed.
The route in oil seems to be a reflexive trade that continues to spiral downward due to all the affected players trying to buy protection against more downside via futures, swaps and other derivatives thus causing more downward pressure that feeds on itself. Fundamentals no longer apply, it is survival mode for everyone in the space including financiers and banks. Getting ugly and soon the warts will be exposed. How big is the energy derivatives market and as it implodes how many will it take down with it? Many people, companies, banks, countries and currencies are heading for some drastic change.
The action in the O&G space is reminiscent of the trading that went on with GE in early 2009. The CDS started pricing in a 50% probablility of bankruptcy when the word for anyone who would glance away from the charts was that GE would be downgraded but would remain investment grade. Guess what? GE was downgraded but remained investment grade. Pull up a 10-yr GE chart and see what contagion looks like when focused on one stock.
That coincided with the suspension of MTM.
The GAAP rules were about to take out the community banks because the secondary market for mortgages and other loans essentially was frozen. There was no price discovery because no one was buying. That meant that good loans would have to be marked as almost without value. The bank examiners would have caused the community banks to fail even in the face of performing loans.
I'm not saying that there won't be bankruptcies or distressed sales in the energy sector. There already have been and there will be more. (I have one of Sabine O&G's bankruptcy motions sitting within reach.) What I am saying is that a fair share of the carnage can come from something other than the basics. It is hard to apply mark to market when there is no market to which to mark.
I made a little money on GE by filtering out the groupthink in the derivatives.
I thought you could securitize the shit out of these loans sell it to naive investors and bet that they would lose. Was that how this is supposed to be? I guess this time its different. Do banks keep any of this exposure on their books. Must be the dumbest bank ever. Banking in America is not about taking risks its all about fee generating model which won't last long. Even then they are not capitalized enough. Lose lose situation.
I'm assuming (yes, that) these are lines of credit.
17 Billion? That's not even one week of QE.
Sigh...missing the point again. The exact quote is "$17B of loans" - not $17B of HY energy bonds. Like the last article on junk bonds ZH conflates bonds with loans. It also neglects the fact that aside from US senior loans having a recovery rate 30 percentage points over bonds (due to covenants, cash flow sweeps, etc.), US banks are largely prohibited from making leveraged loans (Dodd-Frank, Basel III capital charges, and the leveraged lending guidelines from 2014). Thus, the energy loans are likely attached at 2.0x maximum as opposed to something more risky, think 5.0x+. Not at all saying Wells (who I don't follow specifically) or other banks won't take hits, but this is a completely misleading headline.
Sooooo...this is bullish, right?
Is there a kill squad for these guys...cant we do a crowd surfing thing and couple our funds to hire some mercs and take out these banker fcks?