Wells Fargo Earnings - My Take

My take on Wells Fargo earnings:

• 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.

Bank of America - Equity Raise Acheived

Another headline on the tape for BAC this morning:

Bank of America Corp. (BAC) has received confirmation from the Federal Reserve that the company fulfilled its commitment to boost its equity by $3 billion, a spokesman for the bank said Monday morning.

The bank, the largest U.S. bank by assets, committed to raising $3 billion in equity capital when it received approval to repurchase $45 billion in preferred stock in December 2009 acquired as part of the Troubled Asset Relief Program. The Charlotte-based bank faced a year-end deadline to raise the equity.

Bank Of America sought to raise the capital by selling assets.

If the bank hadn't raised the capital by the deadline, it said it might have to pay some employees' bonuses in stock instead of cash. The bank also warned investors it might need to make a dilutive share offering to raise the capital.

Bank of America sold such assets as 51.2 million shares in BlackRock Inc. (BLK) and the right to purchase additional shares in China Construction Bank Corp. 

I am somewhat torn on the Blackrock sale weighing core business vs. investment prospects.  That said, the combination of some legacy agency put-back issues being put to rest and the equity all clear by the Fed puts a nice base under the company.  I believe the equity and debt will have a good year this year and are decent investment candidates.  Admittedly, I am long BAC common and Merill preferreds.  I have a bigger position in Citi, however, as I believe it is better positioned, has less headline risk and wikileaks doesn't seem to be in the cards.

Bank of America - Deal Reached, Put Backs Increased

Way back in October, I wrote that I did not believe that BAC was reserving enough for Put back provisions (seekingalpha.com/article/230817-addressing-bofa-s-mortgage-data-reps-and-warranties) well, It looks as if I was right:

Bank of America Corp., the biggest U.S. bank by assets, resolved disputes with Freddie Mac and Fannie Mae by agreeing to pay more than $2.6 billion to settle disputes that it sold loans based on faulty information.

The lender advanced 4.6 percent in early trading after saying fourth-quarter results would include a $2 billion impairment charge and a $3 billion provision.

Mortgage buyers including McLean, Virginia-based Freddie Mac and Washington-based Fannie Mae are trying to force lenders to buy back loans that may have been made with incorrect data on income and home values. Before the settlement announced today, Bank of America faced $12.9 billion in unresolved putback demands on soured mortgages, with about half related to government-sponsored entities, according to an Oct. 19 presentation to investors. The company said in October it had reserved $4.4 billion for costs related to the problem.

“Bank of America believes that it has addressed its remaining exposure to repurchase obligations for residential mortgage loans sold directly to the GSEs,” the Charlotte, North Carolina-based company said in a statement today.

Hopefully this will go a long way in the effort to put this to bed and move on - until the next BAC issue.

Disclosure:  Long BAC equity and Merill preferred

Bank of America - Let the Beating Continue

Another day, another BAC Whack-A-Mole!

Little equity snapshot:

Yeah, Hows that feel?

Lets turn to the smart money - bonds:

This morning I saw the following quote:

BAC 5 ⅝ 07/01/20    +260/25

Now I am seeing:

BAC 5.625 '20  +268

and

Ya know, the other day I caught some flak over my comment they were under-reserving for reps and warranties.   Ummm, nope, appears others might think so too.

Do not touch the equity until bonds have finished getting spanked!

BAC - If It Was Attractive Before...

Kinda made me laugh:

Gee, if it was attractive before, its getting really attractive now (courtesy NASDAQ).

Dipped my toe in the BAC equity water (already own BML preferreds) and quickly went underwater.  Fortunately, I tend to leg into the falling knives.  I also believe that it is a decent long-term play (and yes, I bought it with that intention being a value/credit guy).