Read yesterday post on Bank of America (BAC), then come back.
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Wells Fargo (WFC) reported today and again, at first blush, great news.
Here are the basics:
- Record profits reflected business momentum across the newly combined Wells Fargo-Wachovia
- Record Wells Fargo net income of $3.05 billion
- Record net income applicable to common stock of $2.38 billion
- Earnings per common share of $0.56, after merger-related and restructuring expense of $206 million ($0.03 per common share) and $1.3 billion credit reserve build ($0.19 per common share)
- Preferred dividends of $661 million included $372 million paid to U.S. taxpayers on the U.S. Treasury’s Capital Purchase Program investment
- Record pre-tax pre-provision profit of $9.2 billion
- Revenue of $21.0 billion reflected growth in both net interest income and fee income resulting from diversified business model
- Record legacy Wells Fargo revenue of $12.3 billion, up 16 percent from prior year
- Best mortgage origination quarter since 2003
- Net interest margin of 4.16 percent, highest among large bank peers
- Total core deposits of $756.2 billion at March 31, 2009, up 6 percent (annualized) from $745.4 billion at December 31, 2008, despite maturity of $34 billion of higher-rate Wachovia certificates of deposit (CDs)
- Consumer checking and savings deposits up 31 percent (annualized) from December 31, 2008
Now, the deposit and checking news is indeed very god news because it is cheap (almost free) capital. The net-interest margin at over 4% is fantastic too. Although, with the new refi boom going on at Wells at lower rates, we ought to expect that to fall down the road. There is a lot to like in the report, a lot, but much of it is a longer term story.
So, what is my problem? This little paragraph :
The net unrealized loss on securities available for sale declined to $4.7 billion at March 31, 2009, from $9.9 billion at December 31, 2008. Approximately $850 million of the improvement was due to declining interest rates and narrower credit spreads. The remainder was due to the early adoption of FAS FSP 157-4, which clarified the use of trading prices in determining fair value for distressed securities in illiquid markets, thus moderating the need to use excessively distressed prices in valuing these securities in illiquid markets as we had done in prior periods.
In other words, Wells booked a $4.3 billion “mark-up” on these assets due to the accounting change. There was no material change to the quality of the assets nor was there a material change to the market at which they were being marked to. Because of this, Wells also sees it capital ratios boosted, artificially many would say.
This is problem for the market as a whole. If the FASB wanted to, they could change the rules even more to allow more ambiguity so that Wells ,B of A, JP Morgan (JPM) and Citi (C) would be able to just wipe out these losses all together.
Now, I have railed against the mark to market rules as they were and for what they did to the banks. But, in this case, the solution to the problem is worse than the original problem. It’s sort of like taking 50 aspirins for a headache, sure the pain is gone but look what you have now. Now, nobody believes banks earnings (at least I hope not) and the marks on these assets are even less trusted than they were before (did not think that was possible).
Why not mark them all to cash flows? After all, isn’t that what anything is really worth? Who cares what the market is selling something for if I am not selling it and it is performing 100% or 90%? Mark it to its production. Simple, no ambiguity, no judgment, no “impaired markets” etc., etc., etc.
Frustrating.
I am holding my shares because we need banks and I think it is very possible Wells Fargo and JP Morgan shareholders are the only major banks shareholders left standing when this is all over. My position is small relative to the whole and I can wait it out no problem.
Still does not make what is going on right…
Disclosure (“none” means no position):Long WFC, none