everyothercatstaken

Rating the Top 12 U.S. Banks - From Hidden Gems to Zombies

An accurate and clear-eyed look at WFCs future.

Several other major positives should be considered in any analysis of WFC: First and most important, WFC has an immense and low cost liability/deposit base) which allows it to fund its assets at large-bank industry-leading net interest margins. During 2008, as Indymac, Wamu and later, Bank Of America were percieved as risky deposit locations, WFC grew its deposits an astonishing 31% as customers fled those banks to move in WFC's direction. The result is that cash earnings from future net interest margins will either amp earnings markedly or cushion presently unseen asset deterioration.

Second, WFC has a history of tight underwriting of assets. When looking at WFC vis-a-vis the rest of the industry, this has to be considered. The evidence can be easily determined with an examination of past credit loss data product-by-product, and current delinquency and default rates. Put that together with loan loss provisions and you get a positive feeling about potential future asset deterioration.

Third, WFC has virtually no capital markets/investment banking business by design---its book is plain vanilla when compared with the the other banks in the top 5.

Fourth, the bank has major real estate loan originating and servicing businesses which put it into an ideal position to capitalize on a potentially more positive real estate future. Its history of prudent underwriting is well known, as is its practice of selling vitually all of its mortgage loan production with no liability tail.

Banks Stressing the System vs. Potential Winners of the TARP Repayment Race

Very helpful analysis, Tyler! The weakeness I see is in the "cumulative loss assumptions" by product. I asume they are from the Barclays' study model. They are uniformly applied to all of the tested banks, yet there are vast differences in the underwriting practices of the banks-----witness the different loss experience we've seen in the various organizations.

There is a straight forward methodology to test underwriting and follow-up. It would involve assembling actual loss data product-by-product in trend form for each bank over a period of years; and delinquency and default data by product over the same period. Comparing the two trend lines for each bank would cry out for an easy algorhythm which could be applied discretely to each banks' product outstandings at 12-31-08 to project hpothetical future loss experience. Those projections can then be adjusted either way based on fuuture macro-economic assumptions.

Trust me, such an approach would reveal vast and real differences between the major banks.