- Tier 1 common ratio is strong at 8.37% as is tier 1 capital at 11.25%. This equates to a TCE improvement of 40bps sequentially and 190bps YOY. Co has stated that their capital is approximately 6.9% under proposed BASEL III.
- Revenue at $21.5B increased $600MM sequentially but fell $1.2B YOY. The revenue increase is obviously good to see and the breadth of the increases is positive.
- Net charge-offs continue to improve both sequentially and YOY.
- Reserve release of $850MM helped drive results. I do not consider these to be "quality" earnings, but as a % of earnings, I can handle their contribution.
- Pick-a-pay and other "funny" loans down significantly - the balance sheet is getting cleaner.
- Commercial PCI loans are driving results within the PCI book. Increase from 3Q10 reflects the reclassification to accretable yield from nonaccretable of $165 million during the quarter I also take this a a glimmer of hope for the commercial mortgage market - a glimmer.
WFC is also looking to redeem callable TRUPs upon gaining regulatory approval. This is a continuation of a theme we have seen from the industry as the instruments will not be capital accretive under new regulation. Essentially, this also makes existing tier 1 issues structurally "safer" than future issues which should lead to increased calls. While much of this has been factored into pricing, it is one area to snoop around for value.
All in all, it was a decent quarter for the bank as the loan book is performing better, capital continues to increase and revenues have showed some improvement.
While the bank has held in well throughout this mess, I find better value in C or JPM debt and equity. Yes, C is more of a wildcard, but I believe it will outperform its peers in the coming year.
WFC CDS in 2bps to 98/103
WFC 4.75 2/15 +95
COMPS:
JPM 4.25 10/15/20 138/134
BAC 5.625 07/01/20 190/185
C 5.375 08/09/20 168/163
Equity:
WFC P/E: 19.1x
JPM P/E: 11.3x
C P/E: NM
BAC P/E: NM
Disclosure: Long BAC and C equity and preferreds. Long XLF.
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