Wells Fargo Downgraded: Oppenheimer's Whitney Goes Too Far

Oppenheimer's Meredith Whitney has now taken Wells Fargo (WFC) to task. She downgraded the stock to Underperform from Perform, saying the company is under-reserved by at least $4.5 billion and will need to take a reserve "true-up" in 2008 and potentially more in 2009.

Whitney cut EPS estimate for FY2008 to $1.20 from $2.15 vs. consensus of $2.33. FY2009E goes to $2.00 from $2.15 vs. consensus of $2.65.

Whitney has been the analyst du jour after her being the first to make calls on Citigroup (C) and the rest of the financial sector. By taking on Wells Fargo, Whitney is also running a contrary opinion to Berkshire Hathaway's (BRK.A) Warren Buffett who has added to his position in the stock recently.

Whitney must be given credit for her calls last fall that came to fruition. One thing does tend to happen when you have a success like that. People tend to then keep going in the same direction for too long.

Wells Fargo is by far one of the most conservative banks out there and when one gets into the write-down guessing game one gets into a very opaque area. We are getting past the large "write-down" area of this situation and now have to begin looking to the other end of it. What will be coming will be "write-ups" on the same securities that have recently decimated bank earnings.

Whitney will most likely be correct that Wells may take additional charges, but the degree to which she has predicted seems a bit excessive for a bank and management with the history of Wells Fargo.

Disclosure: Long WFC.

Comments

[fxtrader07]

unfortunately, the author gives ZERO insights WHY he thinks the estimated future charges are too high. maybe just hope and wishful thinking? I dunno.
one thing is certain, however: there are a lot of loan-portfolio writedowns and land-related loan write-offs in store for WFC. These have only in part to do with subprime. And you better wish that the economy does not slip into a prolonged recession for then the banks , even the most conservative ones like wfc, will actually feel the real heat

[Vancan]

Yes, but the silver lining is that those of us who are still pretty light in WFC will be able to pick up more at lower levels. Now, if she could be turned loose on LYG that would also be helpful. Disclosure: Long on WFC, LYG and USB

[174vishal]

As housing continues to slow we will discover how much the economy was dependent on ever rising house prices. The huge declines in CA mean that many of WFC billions $ in seconds are completly uncollaterilized and when homeowners walk away from the first mortgage the second doesn't have a prayer. Look at the last quarterly, it wasn't just housing where WFC got hit it was consumer credit as well. There won't be any "write-ups" in consumer and lkely few in seconds either.

[buyitcheap]

What a difference a few quarters makes - they said similar things about such calls last summer ...and she was spot on. Could she go 2-2? I'd like to buy WFC assuming management was properly reserving for losses, guess I'll wait a little while.

[ItsJustMe]

In addition to "last fall's" prediction success, Whitney just recently announced that Citi would have to raise additional capital yet again. Did you check yesterday's headlines?

What she's doing isn't rocket science. It's simply looking at the plummeting home values and skyrocketing default rates on first sub-prime, then alt-A and now HELOC's and projecting the coming writedowns.

I have no short position in WFC and don't intend to take one because these banks can hide their problems for months. And I'll offer a warning for bank investors - that's exactly what they're doing. Ignore Ms. Whitney at your peril...

[dougluvs]

Whitney's forecast of additional write-downs at WFC doesn't seem excessive at all given WFC's $85 billion exposure to home equity loans and its heavy exposure to CA real estate market plus the continuing decline of housing prices. However, investors might be wise to scale into a long term investment position in WFC on dips into the low to mid 20s like Buffet has in the recent past.

[Voice of Reason]

The off the wall comments that are posted daily to Seeking Alpha crack me up. If Meredith Whitney said time to jump off a cliff, many would be fighting with each other to get to the head of the line and be the first to obey her.

Even a broken watch is right twice a day. I'd be interesting to know this blond bimbo's ENTIRE stock picking advice for the last couple years before I'm prepared to get out my prayer rug. Anybody some stats?

[Jonathan Christopher]

We are entering an increasingly gray area, with several opposing trends and events, with separate peaks, valleys and magnitudes. These I will summarize below. Because of these events, the net net cannot be predicted, all we can really say is that volatility will be increasing.

The following are the most important factors:
1. The variable rate resets reach a peak in November. Foreclosures resulting from that peak should peak in February and March 2009.
2. Increasing exports of manufactured goods and farm products are fighting with increased dollar value imports of commodities. These have different timings, and I cannot tell what the net is going to be for any one month. This impacts consumer's disposable incomes.
3. Decreased capital availability coupled with increasing unemployment will create increasing rates on Credit Cards and Credit card Defaults. This will roll-over into consumer defaults on fixed rate mortgages.
4. Increasing unemployment will result in increased movement of workers, putting more houses on the market at depressed values - and resulting in more "jingle mail"
5. A change - over in the US legislature and Executive branches will increase uncertainty. This will also increase volatility.
6. Overseas, there is a decrease in reserve food stocks, and what exists is selling at higher prices, increasing political volatility Aded to that is the likelyhood that Putin will see this as a period of US weakness, with increased likelihood of aggressive policy by the Kremlin.

When you put this all together, the result is a crap-shoot of global proportions. A collar on the price of Wells Fargo, assuming increased volatility is the best bet.

[fxtrader07]

@Voice of Reason: you are very long voice and very short reason.

[JKirk]

The talk of people "walking away" from their 1st mortgages is getting a little overblown, in my opinion. People seem to forget that walking away from that mortgage means walking out of your home... and deciding to rent. I bought my home in August 2005 - I timed the top quite well - but I'm still better off paying my mortgage than walking out on it and paying rent (in excess of my mortgage interest) to live in a smaller, less comfortable dwelling. I'll keep my home, thanks. People walking away are either speculators, people that bought too much house or didn't understand how financing their home worked, or those unfortunate enough to have suffered loss of employment or a costly personal (health) crisis. The rest of us can't walk away from our 1st and 2nd mortgages without some serious consequences- and to me that means that, negative equity or not, we're going to keep paying our mortgage to keep living in our home.

[Voice of Reason]

Well fctrader07, I rather be long voice than a member of a herd waiting for Meredith Whitney to snap her fingers and be ready to jump off a cliff at her command.

[stkinvestor]

Wells Fargo's has massive exposure in California, and Real Estate there is dropping like a rock. I don't think Whitney will turn out to be too far off the mark on this one. It may just take a few more quarters, for as someone else on this board just pointed out, banks are working hard to hide (w/govt help via changes in accounting rules) and downplay as many of these losses as they can in order to buy time with the hopes that Real Estate will turn around. Most likely though, Real Estate continues to deflate, and bank capital with it.

[oregonrain]

This is a good discussion. At the end of the day Buffet is in at an average share price of like $34 or so. So the shorts here really think they are smarter?

Agreed that there could be more bad news at WFC and in the financial sector in general. My guess is that its a 50/50 shot at this point. But, if it goes down into the mid 20's I see it as a buying opportunity. The main reason is the relative strength of the stock vs. all the other messed up banks in the US.


At heart I like it when everyone is saying just how messed up a sector is. Not that it isn't. But, if one is willing to wait I think the rewards with this stock could be good. Finally, never bet against real estate in the West in the long run.

Disclosure...Long at av price of $31.

[Hansolo]

For the "short", you may still make money on WFC by being nimble.. But long term you will be burned. Buy low, sell high. Such a high quality company: WFC, when the uncertainty is gone, and when "Meredith Whitney" upgrade the stock, then it's time to reduce or get out WFC. For now, it's time to buy.. and when it goes lower, buy more.

[EE]

Today I bot jan '09 puts on WB & WFC and yesterday made my last buy for silver Eagles which I'll take delivery on. You all might want to read Ted Butler at investmentrarities.com ..... Try the April weekly reports then go back to 1/15, & 2/19. Learn about manipulated markets moving to total blowup that could greatly affect the survival of the COMEX & NYMEX. Nasty stuff is building!

[marko6547]

WFC probably had no subprime. They did/do have 100% mortgages and commonly 80% "first's" with 10% "second's". Even conventional 20% down mortgages are at serious risk to being under water in a year or so, if the Case-Shiller index is correct.

WFC has that S&P AAA rating (only bank that is AAA) to protect. I do not believe it will hold through this downside of the cycle...

[Fernando]

heres what the WFC bulls are missing. THE HOUSING MARKET IS BIGGER AND MORE POWERFUL THAN WFC MANAGEMENT. it doesnt matter that wfc had a better than average underwriting(like that says much) if people get in negative equity they will default even if they had high credit scores and good credit history. what matters is their skin on the game, that is evaporating very rapidly. 'warren buffett told me to' is not an argument to buy a stock, wfc will take big writedowns from their heloc exposure, it doesnt matter that they were conservative, people are defaulting, thats a fact

[Kostya Tszyu's right hand]

JKirk - adding to your thesis, most employers frown upon their employees filing bankruptcy, receiving wage garnishes, judgements, etc. Not a good career move.
VOR - This MW worship is getting a bit tiresome.

[miked69]

Fellas....do some research. The foreclosed property is being soaked up by the market. More escrows are in process right now in the central valley than at any time during the real estate boom. Prices have ticked up and look as if we might have found a bottom. THe smart money has realized you can't build a replacment for these prices. No more CA real estate is getting created and unemployment is still low at 5%. Put all this into perspective.

[carlivar]

Prices are still falling in SoCal. Just pick an area and subscribe to daily email updates on redfin.com and see for yourself.

[Kunst]

Voice of Reason: when you call someone a blond bimbo, your credibility goes right out the window. Name-calling proves nothing about her, a lot about you.

[amtbnkanalyst]

The day after establishing their liquidating bank for reserved problems, Moody's and S&P reaffirmed WFC's AAA rating. This is a reflection of superior management buoyed by the strongest balance sheet in the industry. Look to the organizations liquidity generated through superior demand deposit acquisition capabilities. Also see Tier 1 Capital ratios that reflect this organization can weather the storm. Additionally, their 2nd larget market, Texas, is not experiencing home equity lending problems due to conservative underwriting guidelines dictated by state laws. WFC could be viewed as a bargain buy at these levels.

[paulmars]

https://wellsfargo.com/downloa...

Page 35 shows home equity exposure by State. Texas is way down the list, not 2nd, as the above poster amtbnkanalyst claims.
So much for his credibility.

>>Additionally, their 2nd larget market, Texas, is not experiencing home equity lending problems due to conservative underwriting guidelines dictated by state laws.<<

[paulmars]

I meant Page 55 of the PDF...

[flyerfan]

Wells Fargo has not had a quarterly loss during this crisis, the bank has already, in six months, earned as much as Ms. Whitney projected for the full year. They are RAISING the dividend by 10%. Do you think they would consider this if they were going to need to raise capital "at least once and maybe twice" as she speculates? Sounds like she is not so infallable eh??