There are some real dichotomies out there when it comes to Wells Fargo (WFC).
Here is a WSJ Article on it
So why isn’t the San Francisco-based lender doing more to beef up its cushion against loan losses as the country slips into a recession?
As investors sift through banks’ third-quarter numbers, they will be focusing on the strength of their loan-loss reserves, which exist to absorb losses from defaulted loans. Wells allowed a key measure of reserve strength to drop considerably.
If it had held that measure at its second-quarter level, Wells’s third-quarter earnings would have been half the 49 cents per share it reported Wednesday. At a time when bad loans are expected to continue rising, it makes sense to compare a bank’s loan-loss reserve with past-due loans.
Many of those won’t return to health and will lead to a loss.
In the third quarter, Wells’s $7.87 billion reserve was 1.57 times as big as its $5 billion in past-due loans. That’s down from 1.81 times in the second quarter. Maintaining that ratio at 1.81 times in the third quarter would have taken an extra $1.18 billion out of earnings.
After tax, that would work out to 24 cents a share.
Wells’s defenders might argue that some loan portfolios are not deteriorating as fast as they had been, allowing the bank to ease up a bit on this reserve measure. But that’s a bold step in a faltering economy.
Even after getting $25 billion under the government’s financial-rescue plan, Wells still wants to raise another $20 billion of capital on its own to support its planned purchase of Wachovia (WB).
Here is CFO Howard Atkins on the results and Wells capital situation:
So, who to listen to? I am not overly concerned about this an don’t see it a the big deal some are trying to make it out to be. The tone is that Wells is doing something sneaky in its reserves. I think to many folks are trying to be Perry Mason.
Wells is saying that it has taken the most of the losses on the worst of the loans and that while loan losses will continue to grow as the economy worsens, the size of those losses will not significantly grow. The home equity portfolio, where most of the losses are has portions being liquidated and Atkins did say that liquidation is “going orderly”
Now, Atkins did say that the Wachovia deal will “double the size of the bank” and that they “didn’t need the $25 billion from the gov’t”.
So, in August Berkkshire’s (BRK.A) Warren Buffett, Wells largest shareholder he was either buying shares in Wells or American Express (AXP). At the time I speculated it was Wells (still feel that way) and soon enough we will find out. Wells Chairman at first refused the TARP money from Treasury until Hank Paulson force fed it to him.
What can we discern from that? One of three things. Management is either:
1- Spectacularly stupid
2- Slyly dishonest
3- On top of the situation.
We can eliminate #1 as it is clear Wells Fargo and JP Morgan (JPM) are the class of the industry. Buffett has little patience for #2 and unless he believed management was being totally upfront, he would not have even alluded to increasing his stake in the company.
That leaves #3. Based on results for the past two decades, until proven different, I got to go with that…
Disclosure (“none” means no position):Long WFC, none
Visit the ValuePlays Bookstore for Great Investing Books