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.
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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.
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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!