Wells Fargo: Signs of Stress?

I thought Bank of America (BAC) was strong enough to survive without cutting its dividend. It was better managed than Citigroup (C) and wasn’t in nearly the dire straits that C was in when it was forced to cut its dividend. This all changed with the announced acquisition of Merrill Lynch (MER). When a company such as Merrill is sold at a fire sale, there usually is a reason. BAC is now learning why Merrill was so favorably priced - it got what it paid for. Is this same situation playing out with Wells Fargo’s (WFC) acquisition of Wachovia (WB)?

Once considered the best run bank in America by many analysts, WFC is starting to struggle. Did the WFC executives turn a blind eye to the underlying financial data and only focus on the prize they had been eying for some time? From an outsider looking in, this appears to be the case. After a much larger-than-expected fourth quarter loss, most analysts that follow the bank believe a dividend cut is inevitable and, like BAC, a second trip to the TARP trough could be in the works. Are the shareholders possibly looking at a $0.01 dividend in the future?

In a January 29 note, analysts from Friedman, Billings, Ramsey & Co. pointed out that WFC only remained “well capitalized” by regulators’ lights because of the government’s $25 billion TARP injection. WFC’s 7.88% capital cushion does not compare well with other troubled banks such as Citigroup (11.8%), J.P. Morgan (JPM) (10.8%) and Bank of America (10.7%).

Other warning signs include a sharp increase in the amount of assets held for sale $178 billion from $106 billion in the prior quarter. Goodwill climbed to $23 billion from $14 billion. In this environment, goodwill is a difficult asset to justify to the auditors and ultimately to the Securities and Exchange Commission (SEC). Could future impairments be in the works, as Wachovia did in its final days?

There is reason to be concerned. Though the actors are different, I have seen this play before and the outcome is tragic.

Full Disclosure: No position in the aforementioned stocks.

Comments

[budtrader]

Capital ratios (e.g. Tier 1 capital, etc.) are computed net of goodwill, thus a goodwill impairment charge would have no effect on the capital ratios. Also, "assets held for sale" are already marked-to-market through the income statement for financial institutions, so again, this should not result in a subsequent impairment of capital.

2009 Feb 18 07:47 AM

[GregT]

Unlike BAC's purchase of MER which was decided over a tumultuous weekend during which Lehman went under, WFC purchase of Wachovia was well thought out and weighed. Furthermore, any comparison between the two is not valid. MER was an investment bank with much more difficult to evaluate risks. Wachovia was mainly hampered by the Golden West purchase. The risks to Wachovia were much easier to evaluate and understand. In simple terms, BAC made the MER purchase quite blindly when buying the more complex to understand investment bank, while WFC exercised a fair amount of due dilligence in buying a relatively traditional banking operation.

Having said that, the main conclusion that WFC could be in for a dividend cut and problems in the future is certainly valid. In fact, California's announcement yesterday that 20,000 state workers will lose their jobs is certainly not good for WFC.

2009 Feb 18 07:55 AM

[The Thin Man]

Golden West financial saw this coming, the Sandlers should be publicly beaten and then thrown in jail with Madoff for taking down Wachovia and now threatening the survival of WFC.
When history books are sold to college kids for $250 each about 50 years from now, they will surely tell a story of back room deals where the government used some very convincing "NATIONAL SECURITY" arguments for insisting they close these midnight deals. The only reason you haven't heard the "D" word is because the feds have made it perfectly clear that they do not want the media to cause a panic.

2009 Feb 23 07:06 PM