Wells Fargo: The Good, the (Not Too) Bad and the Ugly

I have a love-hate relationship with Wells Fargo. I have been a customer of theirs for a long time. When I was a student account holder, I used to get upset that they wanted to nickel and dime me for every little thing - like withdrawing your own money [without using the ATM :-)].  Anyway, as my account got larger, they stopped annoying me, and started being nice - very nice.

I later realized that they were being nice so that they can pay me a quarter percent in interest for cash.  In fact,  WFC’s latest 10Q filing (page 11) waxes:

“Core deposits are an important contributor to growth in net interest income and the net interest margin, and are a low-cost source of funding. Core deposits are noninterest-bearing deposits, interest-bearing checking, savings certificates, market rate and other savings, and certain foreign deposits (Eurodollar sweep balances). Average core deposits rose 6% to $318.4 billion for second quarter 2008 from $300.5 billion for second quarter 2007 and funded 81% and 91% of average loans in second quarter 2008 and 2007, respectively. Total average retail core deposits, which exclude Wholesale Banking core deposits and retail mortgage escrow deposits, grew $10.3 billion (5%) to $230.4 billion for second quarter 2008 from a year ago”.

The good:

1. Well managed. John Stumpf, the CEO, resisted the temptation of easy money when he chose to stay away from the exploding sub-prime and alt-a markets.

2. Sticks to its core competencies.

3. Lots of cheap money from core deposit growth. This is very important, as core deposits indicate the confidence of the public in the bank’s ability to stay afloat and thrive.

4. Berkshire (BRK.A) is the biggest stockholder [and has been for over a decade].

5. WFC pays a dividend of $0.34/share/quarter that it easily earns, and that amounts to a yield of 4.5%.

6. The company is not SIV positive, though they recorded a liability of $39 million in Q1, 2008.

7. Total capital-to-risk-weighted-assets ratio was in excess of 11%.  [FDICIA's most recent definition of "well capitalized" is in excess of 10%].

The (not too) bad:

1.  Has $68.2 billion in mortgage backed securities on its books [June 30, 2008], with net unrealized losses of a billion dollars. These will go down in value to $62.2 billion [with $7 billion in unrealized losses] if the interest rate increases by 200 basis points.  Conversely, these will be valued at $72.4 billion with net unrealized gains of $3.2 billion if the interest rate decreased by 200 basis points.

2. HELOC portfolio of $83.8 billion is defaulting at the rate of 3.46% annualized as opposed to 1.36% annualized for the remaining core portfolio.

3. Total allowances for all credit losses were $7.52 billion - or 1.88% of total loans as of June 30. 2008.

4. The stock trades for 2x tangible book value - when most of its peers are at 1x.

The ugly:

1.  WFC's home equity charge-off policy changed in the second quarter of 2008 from 120 days to no more than 180 days, or earlier if warranted, to provide more time to work with customers to solve their credit problems and keep them in their homes.  I complained about this in a previous article.

The bottom-line:

1. I would hold Wells Fargo if I already had it in my portfolio.

2. I will buy the stock if it trades [again] in the low 20s.  It did get there briefly, but I did not pull the trigger back then.

Disclaimers: I have no positions in WFC.  I remain a WFC customer.

Comments

[Jimmy Lathrop:]

Actually, the 10Q filing in July reported a $2.1 Billion dollars on unrecognized securities losses, instead of "merely" a billion. Does that change your outlook?

2008 Aug 26 07:44 AM

[1worldcurrency:]

How does their 68 billion in MBS's compare to Merrill's supposed 30 billion, which were "super senior".

2008 Aug 26 07:53 AM

[ajhough:]

I have owned Wells Fargo for many years and have realized a long term unrealized net gain plus the dividends. It apparently is a well managed bank with less than average risks at this time. I have added at one time or another and would be willing to add at a lower price.

2008 Aug 26 08:28 AM

[paulmars:]

>>Well managed. John Stumpf, the CEO, resisted the temptation of easy money when he chose to stay away from the exploding sub-prime and alt-a markets.<<

You better go do more DD and quit believing what they would have you believe on both subprime and particularly ALT-A.
Start here:
www.youtube.com/watch?...

2008 Aug 26 10:03 AM

[EE:]

Thanks for the U Tube link.. I think I'll hold my Jan 20 puts on WFC longer so the news can spread deeper.

2008 Aug 26 11:17 AM

[1worldcurrency:]

Less than average risk might not be good enough to save them this time.

2008 Aug 26 06:21 PM

[wabuffo:]

Bapcha said "HELOC portfolio of $83.8 billion is defaulting at the rate of 3.46% annualized as opposed to 1.36% annualized for the remaining core portfolio."

I think you misread this in the 10-Q. Its not the total HELOC portfolio that is defaulting at 3.46% but a portion of it.

According to the 10-Q: "We segregated into a liquidating portfolio all Home Equity loans generated through the wholesale channel not behind a Wells Fargo first mortgage, and all home equity loans acquired through correspondents. While the $11.1 billion of loans in this liquidating portfolio represented about 3% of total loans outstanding at June 30, 2008, these loans experienced a significant portion of the credit losses in our $83.8 billion Home Equity portfolio, with an annualized loss rate of 3.46% for second quarter 2008, compared with 1.36% for the remaining core portfolio."

So $11.1 B of HELOC loans not originated by WFC and connected to WFC prime mortgage (such that WFC has both the first and second) are defaulting at 3.46%. The remaining $72.7B of WFC HELOCs are defaulting at just 1.36%.

Perhaps you can now move this to your "The Good" section as WFC's HELOC performance is much better than their peers.

wabuffo

2008 Aug 27 09:55 AM

[wabuffo:]

Bapcha said "Has $68.2 billion in mortgage backed securities on its books [June 30, 2008], with net unrealized losses of a billion dollars. These will go down in value to $62.2 billion [with $7 billion in unrealized losses] if the interest rate increases by 200 basis points. Conversely, these will be valued at $72.4 billion with net unrealized gains of $3.2 billion if the interest rate decreased by 200 basis points."

$46B of these MBS are Fannie/Freddie paper and are held to maturity and actually have been marked up vs. cost as per Note 4. of the 10-Q.

The remainder are WFC's holdings of AAA-prime ABS bonds from non-Federally guaranteed CMOs. Defaults on prime paper are low, and it looks like WFC is holding the senior tranches which get paid first and are unlikely to default. Since WFC holds this paper to maturity, I'm not sure how relevant the mark-to-market is.

wabuffo

2008 Aug 27 10:04 AM

[Lockstep In...:]

Good summary of the bull/bear case. Maybe you could have added your positions on the most likely way to make money investing in this stock.

2008 Sep 04 06:29 PM