Wells Fargo: Earnings Announcement No Cause for Euphoria

Bloomberg reported Monday that Wells Fargo (WFC) may need an additional $5OB to pay back the U.S. Treasury and to cover loan losses. WFC surprised the market last week, by pre – announcing a $3B profit in the 1^st quarter, but provided limited details of that pre – announcement.

We should not be euphoric about this announcement, as there are some unknown details and negative headwinds that the company still faces.

With the current job losses continue to increase at a 700K per week clip, we can expect the credit losses for WFC will rise with the higher unemployment. This will reduce the company’s bottom line, and will impact their earnings going forward.

As reported by Bloomberg, WFC charge – off rate significantly increased to $3.3B in its current quarter compared to $2.8B from the last month.

Credit Suisse analyst Moshe Orenbuch stated,

“Given rising unemployment, continued home price declines and general macroeconomic headwinds, WFC’s consumer and commercial portfolios remain at risk for meaningfully higher credit losses over 2009 and 2010.”

I could not agree more.

I believe the strong movement in WFC is premature, and will settle back down in the mid to low teens.

Disclosure: The author does not have a position in WFC.

Comments

[Moon Kil Woong:]

With dodgy accounting the "profit" banks report means nothing, only cash flow. Sadly, we can not know the extent of their exposure or get accurate readings on their asset values anymore. The balance sheet of financial companies are now half broken and the income statement is 90% inaccurate.

Thus I would write off their quarterly ballyhoo. If they were a plane in the eye of a hurricane they would say everything is clear sailing all the way home.

Apr 14 06:47 AM

[Ishortyou:]

God knows what those accounting books mean unless they open them and make them transparent.

Apr 14 10:20 AM

[Thomas J. G...:]

This article ignores underwriting. Wells Fargo deals a lot with consumers and has better underwriting than other banks. Maybe there will be more unemployment and bad things, but if a bank is careful how it lends its money out, they are going to do better than other banks.

Apr 14 12:47 PM