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.

Wells Fargo - Initial Thoughts and Stats

Some Stats:

• Tier 1 common equity of 8%, up 40bps QOQ and 280bps YOY;
• Tier 1 Capital of 10.9%, up 40bps QOQ and 30bps YOY;
• Net charge-offs as % of avg. total loans 2.14% vs 2.33% 6/30;
• NIM 4.25%, down 13bps sequentially and 11bps YOY;
• Revenue of $20.9 billion; pre-tax pre-provision profit of $8.6 billion
• Record net income of $3.34 billion; $21.2 billion of cumulative net income since Wachovia merger closed December 31, 2008;
• Net loan charge-offs of $4.1 billion, down $394 million, or 9 percent from prior quarter, down $1.3 billion, or 24 percent, from fourth quarter 2009 peak;
• Commercial and commercial real estate nonperforming loans were up approximately $400 million from
  the second quarter.
• Reserve release of $650 million (pre tax) reflecting improved portfolio performance;
• Credit losses continued to trend down, with net charge-offs declining 9 percent linked quarter, and down $1.3 billion, or 24 percent, from the peak in fourth quarter 2009. Allowance for credit losses equal to 150 percent of annualized net charge-offs;
• Foreclosed assets were $6.1 billion at September 30, 2010, up $1.1 billion from second quarter of which
  $509 million was due to transfers from PCI portfolios, and $148 million from an increase in fully insured
  GNMA loans. 
• ROA 1.09% - +6bps yoy
• During the quarter, the Company provided $370 million for mortgage loan repurchase losses compared
  with $382 million in second quarter (included in revenue from mortgage loan origination/sales activities). 
  The lower provision this quarter reflected a decline in demands from agencies on the 2006-2008 vintages
  and lower total outstanding demands as the Company continues to work with investors to resolve the
  outstanding demand pipeline.

All in all, a decent quarter, somewhat surprised at the small mortgage repurchase volume (have to wait for that part of the call to get the assumptions).  For the most part, all segments of the bank are producing positive returns.  Results should help lift financials.

Bonds holding in well.  Think bonds are rich versus peers:
WFC 5¾ '18 120/115
JPM 4.4 '20 181/176
GS  6   '20 213/208

Seller of WFC > JPM.