Friday, September 18, 2009

Is all well at Wells Fargo?

On September 1, a rumour spread rapidly around the City of London and Wall Street: “Wells Fargo is in trouble.”

Wells’ shares duly declined as much 4.8 per cent, the bank’s biggest slide in two weeks and a steeper fall than the wider US market. The FT reported the move thus, as part of a broader story on the performance of US financials:

Traders linked the fall to speculation that the San Francisco-based bank might be preparing a share sale to raise capital. Wells declined to comment on rumours but said it had not changed its position that it does not need to raise external funds to repay $25bn in bail-out funds and plug a capital shortfall identified by the federal government’s “stress tests”.

But it was not the first time that Wells had been buffeted by rumour and speculation, not least because - as the Wall Street Journal noted - the bank routinely maintains a certain stony silence:

Wells Fargo & Co. routinely ducks hard questions from investors. That insistence on silence has lately hurt the San Francisco bank’s stock.


The stock’s wild ride in part reflects investors’ growing unease over Wells Fargo’s refusal to mimic the routine disclosure practices of its large-bank rivals. Whereas J.P. Morgan Chase & Co., for example, provides extra detail about the condition of its operations, Wells Fargo says as little as possible.

But a spokeswoman for the bank dismissed the notion, telling the WSJ:

We provide voluminous disclosure to help investors understand our financial results.

Really?

In April, Wells rattled investors and analysts (and the blogosphere) when it pre-announced its results for the first-quarter (in typically terse fashion). But their agitation wasn’t so much due to the pre-announcement as it was to the content thereof. Housing Wire attributed the bank’s $3bn first quarter profit to little more than accounting wizardry, while analysts at KBW were unimpressed with the scarcity of detail in the release.

Fast forward to September 17, and a sensational post over by Teri Buhl at the Bank Implode blog, titled “Wells Fargo’s Commercial Portfolio is a ticking time bomb”:

I

n order to sort through the disaster that is Wells Fargo’s commercial loan portfolio, the bank has hired help from outside experts to pour [sic] over the books… and they are shocked with what they are seeing. Not only do the bank’s outstanding commercial loans collectively exceed the property values to which they are attached, but derivative trades leftover from its acquisition of Wachovia are creating another set of problems for the already beleaguered San Francisco-based megabank.

Wachovia, which Wells purchased last fall as it teetered on the brink of collapse, was so desperate to increase revenue in the last few years of its existence that it underwrote loans with extremely shoddy standards and paid traders to take them off their books.

And:

One senior member of Wells Fargo’s commercial loan group who deals directly with the quandary, who spoke on the condition of anonymity, said, “One third of this commercial portfolio we took on from Wachovia is impaired and needs to be completely rewritten. I’ve just hired five more guys and we can’t keep up with the volume of defaults. Southeast Florida and Tampa are serious trouble spots.”
Etc.

There are a host of similar assertions and observations in the post, and very little comment from Wells Fargo beyond the requisite PR guff.

The market is increasingly - and rightly - skeptical of Wells’ “nothing to see here” attitude. As Dick Bove remarked in a note on Friday:

The management of Wells Fargo is pleased with the company’s performance. It is growing its deposits at a high rate; claims to be lending money at a fast ace (actually loans fell in the second quarter); it believes that it is generating enough capital to meet requirements; states that its on‐performing loans are under control (they are still rising, however); is impressed by the growth in revenues of its non‐bank businesses; is very pleased with its acquisition of Wachovia; and feels that its disclosure policies are adequate.

Outsiders, in many cases, disagree.

The bank - which had not at the time of publishing responded to requests for comment - is doing itself no favours by staying tight lipped.

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