Total revenues of Wells Fargo in 4Q09 increased 1.0% primarily coming from increased non interest income from mortgage banking and realized gains on debt securities as well as other trading activities. The interest income was down 2.0% (q-o-q) owing to reduced interest earning assets. Loans declined nearly 2.1% or $17.1 billion and the securities AFS (primarily MBS) declined 6.0% or $11.1 billion. The interest expense declined by 4.0% offsetting some of the decline in interest income. Net interest income declined 1.6% to $11.5 billion in 4Q09 from $11.7 billion in 3Q09. Non interest income increased 3.8% to $11.2 billion in 4Q09 from $10.8 billion in 3Q09 primarily owing to increase in mortgage banking income, net gains on debt securities and net gains on trading activities by $344 million, $244 million and $150 million, respectively. Mortgage banking income increased largely due to changes in the fair value of MSR (Mortgage Servicing Rights - a level 3 derivative with valuation derived by management opinion from non-market inputs). Thus, the increase in non interest income was largely driven by trading gains and changes in fair value due to changes in assumptions in valuation models.
Provision for loan losses declined to $5.9 billion in 4Q09 from $6.1 billion in 3Q09 while the total net charge-offs increased to $5.4 billion in 4Q09 from $5.1 billion in 3Q09. The increase in charge-offs primarily came from commercial real estate while the charge-offs of the residential mortgage increased marginally. All readers are welcome to download my CRE 2010 Overview in order to see where this is going. The nonperforming assets increased from $23.4 billion in 3Q09 to $27.6 billion in 4Q09 with non accrual loans increasing from $20.9 billion to $24.4 billion. The increase primarily came from a) residential mortgage where non accrual loans increased $2.2 billion and b) commercial mortgage where non accrual loans increased $1.4 billion. While the NPAs increased substantially in 4Q09, the allowance for loan losses increased marginally from $24.5 billion to $25.0 billion.
Non interest expense increased to $12.8 billion in 4Q09 from $11.7 billion in 3Q09 primarily from higher Wachovia merger integration and severance expense and expense on ARS settlement. Net income was down 9.1% to $3.0 billion in 4Q09 from $3.3 billion in 3Q09. WFC charged nearly $2.4 billion in preference dividends in 4Q09 out of which $1.9 billion was deemed the dividend upon redemption of TARP preferred stock. The net income available to common shareholders was $394 million against $2.6 billion in 3Q09.
Reggie Middleton's Take
The bursting of the massive real estate bubble and associated Asset Securitization Crisis has seriously impaired the US financial system. US banks' profitability and solvency will continue to be threatened until their balance sheets are purged of the loan losses by writing down the portfolio to the realizable value. This value is currently, in our opinion, on a continuous downward trend, contrary to the opinion of many analysts, consultants and pundits. As pointed out in the CRE 2010 Overview and my blog posts as far back as 2007, commercial real estate (CRE) is the next major crisis brewing due to the inability to rollover underwater debt and the signs of the same have started to emerge in the banks' books. This, coupled with continuing losses from the rolling losses across various classes of debt in the residential space and weak consumer lending and associated non-performing assets, underlines the huge risk attached to the sector and undermines any investment proposition.
The credit quality of WFC loan portfolio
Credit conditions continue to deteriorate as the delinquency rates continue to climb and the nonperforming assets continue to increase. Total nonaccrual loans increased 17.0% (q-o-q) to $24.4 billion or 3.34% of total loans* at the end of 4Q09 from $20.9 billion (2.8% of total loans*) at the end of 3Q09. Non accrual loans in commercial real estate increased 25.9% (q-o-q) to $7.0 billion in 4Q09 (5.6% of loans*) from $5.6 billion (4.5% of loans*) in 3Q09. The non accrual loans in residential real estate increased 22.2% (q-o-q) to $12.4 billion in 4Q09 (4.2% of loans*) from $10.1 billion (3.4% of loans*) in 3Q09. The increase in non accrual loans in residential mortgage came primarily from in residential first lien with nearly 53% of the total increase in the segment coming from Pick-a-Pay (mainly Option ARM) portfolio acquired from Wachovia. Total non performing assets increased 17.9% (q-o-q) to $27.6 billion (3.78% of total loans*) from $23.4 billion (3.15% of total loans*) at the end of 3Q09.
Loans 90 days or more past due and still accruing increased 13.9% (q-o-q) to $6.8 billion in 4Q09 from $6.0 billion in 3Q09 with q-o-q increase in commercial real estate and residential real estate at 18.5% and 5.0%, respectively.
There is 27 pages of Wells Fargo Q4 opinion and analysis awaiting those who are interested. Subscribers also have access to geographic charge-off analysis.
Morgan Stanley, Goldman Sachs and Suntrust are up next, then I will extend my China short thesis (which is paying off handsomely as are the MS and GS shorts) and I will finally released the Central European short thesis - which should be a biggie.