Wells Fargo Confirms My thought

Posted by Ray on October 21, 2009 under Main | Be the First to Comment

Looking through the company’s earnings I see nothing that makes me think the crisis has really ended or that credit is even close to expanding or delinquencies are subsiding. They have a very complex balance sheet so picking it a part is not an easy task and who knows what they have in off balance sheet items, I am sure it is pretty ugly whatever is sitting in La-La land in the Caymans.

Here is what I see, lending is down across the board, except for foreign lending. Total commercial lending is $318,886 vs. $333,484 which is clearly down, but not horrible but not good either. On the consumer side it is not much better as we see $450,784 vs. $458,036 which, again, is down and shows the direction of lending. The number is much better than the YoY number, but that is not surprising. However, are these numbers indicative of the rapid recovery that we keep hearing about on CNBC? Not a chance.

The other side of the credit story is the build is reserves for credit losses which look not so bad in WFC’s case of only an additional $1B. This is on top of billions already and the firm has a total of $24B in total loan loss reserves, not a good side. Remember the Pick-a-pay loan? That is the reverse amortization loan Wachovia screwed people over with? Yeah, they are modifying those like crazy, some 900,000+ and counting, but we know those modifications fail within 90 days so look for more defaults in the near future.

Not only that, but total nonperforming assets for 3Q equaled $23.45B for WFC, and CNBC can’t figure out why the stock down ticked on the earnings. Not only that, but those damn Pick-a-pay loans keep coming up and there was a negative change in the balance on these garbage loans, a negative adjustment in the value of $18B in fact. Of course, this did not impact the earnings of WFC because Congress and the FASB allow the company to lie to you. There is also a section in the report where it shows another $18B in loans that are 90 days late, whether this is the same item or not is unclear, but it is likely that it is. Either way, this confirms that the credit quality of all banks across the country is deteriorating.

Would I own WFC? Not a freaking chance, not even with your money. They have $57B in reverse amortization mortgages on the books that they are working like mad to modify, but we know the modifying these things still fail. Not only is the firm keeping $57B in the loans on the books, but the average LTV is 105% and the actual total carrying value out of that $57B is $37B, unreal. We are also seeing WFC take $6.5B in commercial real estate losses, yup that other shoe that is dropping or that we are told is not dropping, but it is dropping. Now, the PCI or nonaccrual PCI data in the WFC earnings do not impact the earnings, but the negative adjustments show what is to come.

Like I said, the WFC balance sheet is incredibly complex and we do not know what is held off balance sheet. However, what is on there, IMHO, is not pretty and even though much has already been written down, it does not look like it is getting much better. In fact, much of the problem assets seem to be getting worse, from what I can see. Piecing together from what other big and small banks have reported, credit is extremely tight and getting tighter and the quality is deteriorating which means more losses to come.