Sunday, 24 January 2010 23:00

The Wells Fargo 4th Quarter Review is Available, and Its a Doozy!

I have decided to release a significant amount of opinion on Wells to the public, and have created an extended version of the report for subscribers with geo-specific charge-off estimates stemming from the FDIC/NY Fed model that we have created in house. A rather comprehensive piece of work. It appears that much of the sell side community is much, much more optimistic on the prospect of Wells than I am. It must be the Warren Buffet investment...

In short:

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.

wfc_q4_charge-offs.jpg

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.

wfc_q4_allowances.jpg

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.

archive WFC 4Q09_Review 2010-01-26 05:37:52 1.32 Mb

pdf WFC 4Q09_Review- subscriber edition 2010-01-26 05:38:43 1.46 Mb

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.

Last modified on Sunday, 24 January 2010 23:00

10 comments

  • Comment Link Reggie Middleton Tuesday, 02 February 2010 01:20 posted by Reggie Middleton

    I did about 55% annualized in 2007, took 2006 off. Invested in real estate in from 200 to 2005(ish), with a very high IRR of over 50% (roughly) - yes, as a highly leveraged bull. That's how I saw the crisis coming, I went into the financial markets shorting everything that had to do with real estate.
    I was down 39% for 2009, my first full down year in 10 years. The fundamentals fell out of touch with the markets for an extended period of time at the same time I was distracted by my father having cancer, thus I took too long to go market neutral, which I should have done in May(ish). All in all, the distraction can easily be viewed as an excuses, though. Down is down.

    Be aware that no one is going to have an up year every single year. The key is to make more money than you lose. I am not a bear, I am a realist. I would love to be able to go long, or go long/short based on the fundamentals (not as a trading hedge), but I see a very risky, overvalued equity market being underpinned by a fragile banking system being supported by lies and changes in the ways one accounts for P/L, not by true profits, economic gains and cashflows.

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  • Comment Link ERIC Clark Monday, 01 February 2010 23:52 posted by ERIC Clark

    REGGIE
    JUST SIGNED ON TO YOUR SITE, VERY INTERESTING ANALYSIS. I ONLY SEE PERFORMANCE AND ANALYSIS SINCE JAN 08, WHAT WERE YOU DOING BEFORE THEN? HOW WELL/POORLY DID YOU DO IN BULL MARKETS? IM IMPRESSED BY BEARS THAT CAPITALIZED ON THE LAST 2 YRS CATASTROPHIES BUT ITS A RARE BEAR THAT HAS A LONGER TIME HORIZON OF BEING SUCCESSFUL. AND EVEN MORE IMPRESSIVE IS THE INVESTOR THAT HAS BEEN ABLE TO OUTPERFORM BULL AND BEAR MARKETS CONSISTENTLY YEAR AFTER YEAR. WOULD LOVE TO KNOW YOUR STATS IN LONGER THAN JUST THE LAST FEW YEARS. THANKS

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  • Comment Link Reggie Middleton Wednesday, 27 January 2010 10:42 posted by Reggie Middleton

    I think the tide has turned for the banks and their free government ride. they abused the capital support privileges they were given and took the current administration for idiots. If they dump MBS they will have to take appropriate marks or convince the government to signficantly overpay (some more) for them. Neither of which I see happening in the short term.

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  • Comment Link monday1929 Wednesday, 27 January 2010 08:42 posted by monday1929

    Reggie, Is there anything to stop the Banks, with Treasuries o.k., from dumping all their near worthless mortgages and MBS into Fannie and Freddie now that they can take unlimited losses on behalf of the taxpayers? Any chance they will change laws and shove worthless CRE in there too?

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  • Comment Link Reggie Middleton Wednesday, 27 January 2010 02:51 posted by Reggie Middleton

    BEN, is a reflection of the long only market (as an asset manager). It was a good short when the market was crashing, it reversed when the market surged, and if the market takes a significant dive again, you will notice how richly priced it is. Notice the recent price action.

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  • Comment Link Reggie Middleton Wednesday, 27 January 2010 02:49 posted by Reggie Middleton

    I will be getting to the other banks in my quarterly reviews as well. Many will be hurt if they have to relinquish prop trading, for then they will need profitable banking businesses which they will not have until lending picks up and they clean up their balance sheets, neither of which are on the horizon, short term.

    The only impediment is transparency and clarity due to the fact that FASB has authorized them to lie, and their regulators have institutionalized extend and pretend. Eventually, cash flow concerns will catch up to the lies, particularly as their loan portfolio shrinks and fee income dwindles since their core business (lending) is actually shrinking instead of growing.

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  • Comment Link Reggie Middleton Wednesday, 27 January 2010 02:42 posted by Reggie Middleton

    There's no doubt that the spring rally hurt the bears. It hurt me as well. My issue is that Badger seems to have forgotten everything that happened before that, and even seems to take issue with things that happened after that. A positions profitability is the average of the returns, not the lowest point of the returns. Goldman Sachs was probably the most profitable short/put trade I have ever made, most likely due to the very high share price. I caught them from $185 down to $75, made a trading error that gave up a little profit, failed to cash in at the low price of $50 something, and have been nibbling at them from $100 since. Remember, I urged all to take profits often and regularly, for you never know what will happen and a bird in the hand is worth more than two in the bush. This past 6 month or so bear rally is a perfect example. I still thing they are drastically over priced due to the headwinds facing them.

    Look at the chart, I came out with the bear research in June of 2008, it dropped over 120 points, enough to declare a killing.
    [img]http://chart.bigcharts.com/custom/interactivebrokers-com/big.chart?symb=gs&sid=147544&time=2yr&freq=1dy&compidx=aaaaa~0&ma=0&maval=60&uf=0&lf=1&type=256&sPage=cr/charting&mocktick=1&country=US&doChartIV=0&style=1943&size=1&rand=6833[/img]
    It has dropped again over 40 points since October, and I am very doubtful they are deserving of either a higher share price or their current share price, at least for the short to medium term.

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  • Comment Link hmc Wednesday, 27 January 2010 02:29 posted by hmc

    ya, I'm still holding on to my GS short last year at $100. I really got hammered on BEN, JPM, WYNN and PNC! Hopefully I'll make some if it back this year... lol

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  • Comment Link Reggie Middleton Wednesday, 27 January 2010 02:13 posted by Reggie Middleton

    I was putting out bearish statements on the company when it was in the $180's Badger. It went down to at least $65 dollars and back again, and looks like it is on its way down. It dropped to nearly $150 from nearly $190 (or so) since the year started. Don't tell me that you are suffering from short term memory-itis as well???


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  • Comment Link NDbadger Tuesday, 26 January 2010 22:09 posted by NDbadger

    how can you say you are making money on your GS short? you were putting out bearish statements on this company when it was in the 80's. Did you only put your short on it over the last two weeks. This is not cool.

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