Wells Fargo: Ready To Blow?

Wells Fargo: Ready To Blow?
Buying Wachovia was strategically astute but financially messy.

September 25, 2009

"Together we'll go far." Wells Fargo's corporate slogan is a pledge to its customers, but it might just as well reflect the San Francisco banking giant's optimism about its takeover of Wachovia, a teetering rival it snatched from under Citigroup's nose last October. Losses from the acquisition are "still in the same zip code" as the sum envisaged at the time, says John Stumpf, Wells's chief executive. In another sign of self-confidence, Dick Kovacevich will step down as chairman at the end of the year, a move that would be hard to imagine if the bank's hands-on former boss were worried about the future.

Others are less convinced, suspecting Wells of understating Wachovia's loan losses and questioning its accounting. Fuelling these worries, says Dick Bove of Rochdale Securities, is "extraordinarily poor" communications and disclosure. Alone among big banks, Wells does not hold a quarterly call for analysts.

Had it not bought Wachovia, Wells would be one of finance's clear winners. Long one of America's more conservative lenders, it avoided the most noxious property loans and securities. As Warren Buffett, a fan and shareholder, put it in April: "What Wells didn't do is what defines their greatness." Wachovia changed that. It brings opportunities, but also risks.

On the positive side, the merger has doubled the number of Wells branches to more than 6,600, giving it a footprint that only Bank of America comes close to matching. Wells and Wachovia were "mirror images" of each other, says Mr. Stumpf, with Wells strong west of the Mississippi and Wachovia powerful to the east.

This gives Wells huge deposit-gathering power, as well as an opportunity to pump more products to Wachovia customers, who typically have four to five products with the bank, compared with almost six for Wells clients. Mr. Buffett sees echoes of Wal-Mart in Wells's retailing ethic. The merger gives Wells a formidable position in areas such as mortgages. In the first half of the year it handled a staggering 23.5% of all new home loans, according to Inside Mortgage Finance, a newsletter.

But Wachovia also brings credit problems that could take years to resolve. A big worry is its range of "Pick-A-Pay" retail loans, which allowed borrowers to defer principal as well as interest payments: of those that were still current at the time of the merger, 3.2% were seriously delinquent as of June 30th, up from 1.1% in March. The default rate on the bank's $38 billion of property-development loans is several times the national average (though Wells argues that the official numbers do not reflect merger-related adjustments). A big chunk of its $127 billion commercial-property portfolio consists of interest-only loans with a balloon payment at the end, the wholesale equivalent of Pick-A-Pays. These will be hard to refinance.

Another worry is the large amount of credit protection that Wachovia is thought to have sold on risky tranches of mortgage-backed securities. Wells points to its latest filing, which shows $105 billion of protection sold and a similar amount bought. But the extent to which the latter really offsets the former is unclear.

Then there is capital. Among big banks, Wells scores poorly on Tier-1 common equity, the core-capital measure favored by regulators. It is well below the 6% level that is likely to be the minimum required in future. And at some point it will have to repay the $25 billion of government capital it got last year.

Wells puts its relative capital paucity down to "purchase" accounting at the time of the Wachovia deal. It immediately wrote down $40 billion of the $60 billion in total losses it envisaged. This upfront hit took a big chunk out of its equity, but put it ahead of peers in dealing with losses. Andrew Marquardt of Fox-Pitt Kelton estimates that Wells has swallowed 60-70% of its expected losses, twice the proportion recognized by a typical large bank.

Wells also argues that analysts and regulators underestimate its earning power. It generates pre-provision profits of around 3% of assets, compared with 2% for its peers. Wells has already plugged the gap identified in this year's stress tests, generating almost half the necessary capital internally (and the rest from a share offering). But, thanks to the uncertain economy and concerns about Wachovia, doubts linger. Mr. Bove likens the bank to a rumbling volcano. If it blows, Wells will need lots more capital than it produces internally.

quote:

Wells Fargo CEO Sees Bad Loans Rising

By MARSHALL ECKBLAD

NEW YORK -- Wells Fargo & Co. Chief Executive John Stumpf reiterated Wednesday that he expects the San Francisco bank's nonperforming assets, or troubled loans, to increase next quarter. He also said the bank has used 21% of its credits for losses tied to some commercial and foreign loans from Wachovia Corp., which Wells Fargo purchased last year.

Speaking at a financial services conference in New York hosted by Barclays PLC, Mr. Stumpf said Wells Fargo has used $2.2 billion of an available $10.4 billion in credits for losses from the most troubled of Wachovia's commercial and foreign loans. Wells Fargo has a remaining $8.2 billion to cover future losses from the loans, which include mortgages tied to commercial properties like office buildings and housing developments.

John Stumpf

Separately, Mr. Stumpf said he expects the bank's levels of nonperforming loans, or loans that may become uncollectible, to increase.

"Considering the current economic environment, we would expect our nonperforming assets to continue to increase," Mr. Stumpf said.

Wells Fargo issued a similar forecast when it reported its earnings for the second quarter.

Mr. Stumpf's message is a contrast to remarks on Tuesday from the chief executive of Regions Financial Corp., C. Dowd Ritter, who said nonperforming loans at his regional bank, based in Birmingham, Ala., likely peaked in the second quarter.

Shares in Wells Fargo were recently up 86 cents, 3%, to $29.44.

Wells Fargo bought its teetering rival, Wachovia for $12.7 billion at the end of last year after the Charlotte, N.C., bank began to crumble under losses from billions in risky home loans. A crucial component of Wells Fargo's merger of the two banks is whether Wachovia's piles of risky real-estate loans perform as Wells Fargo initially expected over the coming quarters and years.

During this decade, Wachovia expanded aggressively into mortgages for commercial properties such as housing developments and office buildings. Analysts widely expect commercial real-estate loans to hit banks with heavy losses over the coming year since losses from commercial loans typically rise months or years after losses from home loans surface.

At the time of the purchase, Wells Fargo was permitted by accounting rules to declare $96.2 billion of Wachovia's loans as "credit-impaired," or likely to produce losses. Wells Fargo was allowed to immediately write off the $40.9 billion losses it expected those loans to generate in order to prevent the bank from being damaged by Wachovia's loan troubles.

Of the $40.9 billion in credits for Wachovia losses, Wells Fargo said Wednesday that it has used $3.8 billion thus far to offset losses on Pick-A-Pay loans, a risky type of home mortgage.

"Overall, our impaired loans, including Pick-A-Pay and commercial real estate, have performed in line with our original expectations," Mr. Stumpf said. He called those loans "the two loan portfolios of most interest to investors."

Wachovia issued more than $120 billion of the risky home loans, which offered borrowers the option of four monthly payments, including a minimum payment that increased the loan's balance.

Wells Fargo expects the most troubled Pick-A-Pay loans, whose losses can be covered by the credits, to generate another $22.7 billion in losses.

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Lijkt me zeker een bank om in de gaten te houden.... Dit is een bank die gedurende de credietcrisis behoorlijk is opgezwollen (naar too big to fail) maar de onderliggende problemen zijn verre van over (sterker nog de wanbetalingen nemen nog steeds toe). Ook de real-estate marges steeds verder onder druk te staan.

Aan de ene kant willen ze de bailout terug betalen maar aan de andere kant zijn hun kapitaalbuffers wel erg mager.

Wat klopt er dan niet aan dit verhaaltje ?!? Daar moet volgens mij inks of rechtsom gewoon cash bij.

Some have suggested today that Wells Fargo is selling loans to itself to avoid the 120-day point “where Wells counts a loan as “defaulted.”

Please understand that these transfers are normal business practice......