Wednesday, July 22, 2009

Wells Fargo Results

Unsurprisingly, given the graciousness of the now unrespectable Financial & Accounting Standards Board, Wells Fargo posted an accounting profit.

The San Francisco-based bank has been adding market share since buying Wachovia on December 31 and as rivals, including Countrywide Financial Corp, reduce risk or vanish.

Many analysts, though, have expressed worry that Wells Fargo will need to raise more capital to cover potential losses from real estate loans, including the option adjustable-rate mortgages it inherited when it bought Wachovia.

Despite getting $25 billion of federal bailout money, Wells Fargo was found under a federal "stress test" to have a $13.7 billion capital shortfall.

Second-quarter net income applicable to common shareholders rose to $2.58 billion, or 57 cents per share, from $1.75 billion, or 53 cents, a year earlier.

Before payment of dividends, net income rose 81 percent, the bank said. Revenue nearly doubled to $22.51 billion, with 39 percent of the total coming from Wachovia.

Results reflected per-share charges of 8 cents tied to helping replenish a federal deposit insurance fund, and 3 cents tied to merger and restructuring costs.

Chief Credit Officer Mike Loughlin said the bank expects credit losses and nonperforming assets to increase, despite "some moderation" in the rate of growth in some consumer portfolios.

I've been hearing rumblings from local Wachovia bankers about Wells Fargo's credit portfolio deteriorating pretty quickly. Wells still has over $90 billion in option ARMs ready to blow up and another $117 billion in home equity loans that are likely underwater or worthless. In addition, Wells still has prime mortgages, $23 billion in credit cards, $137 billion in commercial real estate, $184 billion in C&I, & consumer/auto loans that are likely going to take impairments as the recession continues. All of this is on about $48 billion in real non-government capital, $100 billion if government capital and marked up assets are included. Just a small impairment on these loans could really take a toll on Wells.

The Wells/Wachovia takeover was about the dumbest thing ever concocted. You take one failing bank highly exposed to CDOs and jam it into a West Coast subprime/option ARM real estate nightmare and you get some pretty fireworks. As long as Wells doesn't have to mark to market then they will "earn" their way out of the mess over the next 10 years just like every other bank.

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