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Did Wells Do Well?

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April 22, 2009 – Comments (1) | RELATED TICKERS: WFC

Wells Fargo surprised no one this morning by reporting nearly the same earnings they had pre-announced earlier this month; $3 billion in the pre-announcement, $3.05 billion in the earnings report.

After zinging Citigroup on their earnings last week and reading a number of blogs and articles (here and here for example) summarizing some of the accounting and one-time charges that went into other banks earnings, it seemed only fair to give WFC the same review.

As usual, there was some good news, some bad news and some confusing news.

The good stuff:
Record pre-tax, pre-provision earnings of $9.2 billion

Record revenue of $21 billion

Core deposits up

Confirmed expected annual savings of $5 billion with Wachovia merger

Wachovia merger reported to be going as planned

Tangible common equity (TCE) and Tier 1 capital ratios both up

Nearly $23 billion in loan loss reserves, a $1.3 billion increase from last quarter and enough to cover 12 months of expected consumer losses and 24 months of expected commercial losses

A lot of Wachovia’s really toxic stuff was heavily marked down with the acquisition.  As a result, WFC asset quality is probably quite a bit better than their peers.

The rest:
That $3.05 billion profit is before paying out $661 million in preferred dividends, income to common share holders was $2.38 billion.  $372 million of that dividend payment was to the U.S. Treasury on the TARP preferred.

Mark-to-market accounting appears to have played a significant role.  Using the recent accounting changes, WFC reduced their unrealized losses by $4.4 billion before taxes, $2.8 billion after taxes.  I agreed with the accounting rule clarifying/relaxing mark-to-market.  However, if I read the footnotes correctly this was effectively the source of WFC’s profit for the quarter and it’s a one-time event.

Other comments and summary:

Mortgage refinancing is going very strong and should continue to generate good revenue from originations for WFC for a while.

WFC’s comments in the release indicate they believe their loss reserves are more than adequate and that some of the reserves will come back at some point in the future.

I continue to believe WFC is one of the best managed big banks, however near zero Fed rates, the refinance boom and mark-to-model accounting loss reductions won’t continue indefinitely.  Furthermore, I don’t see where the funds to repurchase the Treasury preferred will come from without credit losses leveling off and there isn’t much sign of that.

After all the hype from WFC and other banks about record quarters and improving business conditions, I was disappointed to find that (I think) the profit was essentially due to an accounting change.  If anyone familiar with accounting has looked at the WFC release, I’d appreciate comments either correcting or confirming my take on the accounting change.

I have owned WFC stock for sometime now and continue to believe they will survive and eventually thrive.  However, after reading the earnings release, I straddled the fence between a continued rough near term view and positive long-term view.  Sell order entered for about half my shares.  I feel pretty confident that some piece of bad news in the banking sector will pop up over the next few weeks or months and give me the chance to buy them back at a lower price.  But not confident enough to sell all of it.

1 Comments – Post Your Own

#1) On April 22, 2009 at 11:18 PM, nuf2bdangrus (< 20) wrote:

I think you may have a chance to get it at 12 when the failing banks get natioanlised.  Or try their preferred WCO

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