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.

Citigroup - Taking debt Out of Bad Bank

As I own Citigroup equity and preferred, I saw an interesting item come up on my alerts today.  Citi filed an 8-k announcing an exchange and consent offer for $392 million of CitiFinancial Credit (formerly Commercial Credit Corp) debt.


Essentially, this is an exchange of Citi Holdings Co ("Bad Bank") into Citigroup notes.  It would appear to me that Citigroup is preparing to shed assets of Citi Holdings and the buyer is not going to assume the debt associated with the assets.


The exchange and consent memorandum is expected out starting today - I haven't found it on EDGAR, but if anyone wants to forward it, that would be great.




From the 8-k:

The purpose of the Exchange Offer and Solicitations is to provide Citi Holdings greater flexibility with respect to the business and assets of CitiFinancial Credit Company.

The exchange details: 

Eligible Holders have the opportunity to either (i) exchange any and all of their outstanding Old Notes for Citi’s intermediate term benchmark notes (the “New Citigroup Notes”), thereby delivering consents, or (ii) deliver consents for the Consent Payment without tendering their Old Notes, upon the terms and subject to the conditions set forth in the Offering Memorandum and Letter of Transmittal.  Eligible Holders who deliver their Old Notes in exchange for New Citigroup Notes in the Exchange Offer will not be eligible to receive the Consent Payment as the Early Exchange Consideration will be consideration for such Eligible Holder’s consent (provided that the Eligible Holder tenders the Old Notes prior to or on the Early Tender Date (as defined below) and does not withdraw them prior to the revocation deadline (as described in the Offering Memorandum).

Citi Restarts Dividends on Preferred Securities

On February 27, 2009 Citi announced the suspension of dividends on its Preferred Stock. Pursuant to the exchange offers, Citi offered to exchange up to $14,923,650,000 of its outstanding publicly-held Preferred Securities for Common Stock at a price per share of $3.25; 98% of the Preferred Stock elected to participate in the exchange offers. Dividends declared today will be paid on the Series AA, T, E and F Preferred Stock that remains outstanding.

• 6.5% Non-Cumulative Convertible Preferred Stock, Series T, payable November 15, 2010, to holders of record on November 5, 2010. Holders of depositary receipts, each representing one-thousandth of a full convertible preferred share, will be paid $.8125 for each receipt held. (C-I)
• 8.125% Non-Cumulative Preferred Stock, Series AA,  payable November 15, 2010, to holders of record on November 5, 2010. Holders of depositary receipts, each representing one-thousandth of a full preferred share, will be paid $.5078125 for each receipt held.  (C-P)
• 8.40% Fixed Rate / Floating Rate Non-Cumulative Preferred Stock, Series E,payable November 1, 2010, to holders of record on October 20, 2010. Holders of depositary receipts, each representing one-twenty-fifth of a full preferred share, will be paid $42.00 for each receipt held.
• 8.50% Non-Cumulative Preferred Stock, Series F, payable December 15, 2010, to holders of record on December 3, 2010. Holders of depositary receipts, each representing one-thousandth of a full preferred share, will be paid $.53125 for each receipt held. (C-M)

C-P:  $25.57 +$1.47 (+6.10%)
C-M: $25.35 +$1.36 (+5.60%)
C-I:   $46.00 +$2.90 (+6.73%)

Why now, you ask?  Well, if they had deferred further, the preferred holders would be able to name representatives to the board

DISCLOSURE:  I am long Citi preferreds

Citi - First Blush

Citigroup's Tier 1 Capital ratio was 12.5% (T1 capital stands at $125B), compared to 11.99% in the second quarter 2010. Citigroup's Tier 1 Common ratio was 10.3%, up from 9.71% in the prior quarter. - Targeting to operate in a Tier1Common ratio range of 8%-9% under Basel 3, but targeting those levels in 2012.

Citigroup's total allowance for loan losses was $43.7 billion, or 6.73% of loans.  There was a loan loss release of nearly $2B during the quarter (following a $1.5B release in Q2) - primarily from the Citigroup "bad bank" entity.

Citigroup revenues were $20.7 billion, down $1.3 billion sequentially, on lower Local Consumer Lending and Securities and Banking revenues.

Citigroup net credit losses declined $303 million, or 4%, sequentially to $7.7 billion, reflecting continued improvement across most consumer portfolios.

$2.5B in mortgage repurchases YTD,  $952MM in repurchase reserves.

All in, a decent quarter.  Citi, due to the govt intervention and backstop, is one of the cleaner banks among their peers.  Citi Holdings continues to shrink as a % of assets.  Capital ratios are strong and the bank is targeting 2012 for being Basel 3 compliant.

I like Citi vs. BAC and JPM vs. Wells

Citi CDS Trading Tighter Than BAC

Citigroup’s rate fell below Bank of America’s this week for the first time since September 2007.

The five-year swap rate for Bank of America rose today to 200 basis points, according to Phoenix Partners. The rate stood at 180.5 basis points yesterday, based on Bloomberg data. Each basis point equals 0.01 percentage point and amounts to $1,000 a year on a contract protecting $10 million of debt. Citigroup’s rate was 165.4 basis points yesterday.



Lets not forget that Citi disposed of the majority of their toxic assets to the govt and wrote down a massive amount of the rest.  I have long said that Citi's books are cleaner.

Disclosure:  Long C equity and preferreds. 

Citi Mayo - Round 2

CITIGROUP SAYS MAYO 'HAS BEEN FLAT-OUT WRONG' ON CRITICISMS

Citi Statement on Mike Mayo Meeting

 "Citi CEO Vikram Pandit and CFO John Gerspach met with Mr. Mayo and investors on Friday afternoon. We had a productive dialogue with the investors and covered a number of topics including Citi's unique global footprint and prospects for future growth as well as other business-related matters.

 "Mr. Mayo raised several topics that he has written about recently in his research reports. He has been flat-out wrong and those criticisms were rebutted very clearly.

 "First, Mr. Mayo's claim that Citi has incorrectly accounted for our deferred tax assets is without merit.  A critical factor in determining the value of a company's deferred tax asset (DTA) is its future earnings power.  Citi has returned to profitability in 2010, and importantly, our core businesses in Citicorp represent a strong, profitable franchise.  Mr. Mayo himself estimates that Citi's net income will grow over 30% per year between 2010 and 2012 and Citi's total net income during this period by his estimates will exceed $37 billion.  Mr. Mayo's own analysis underscores Citi's return to sustained profitability and growth. This view contradicts Mr. Mayo's statement on Citi's DTA.

 "Next, Mr. Mayo recently claimed that Citi is cutting its capital expenditures and that this is a risk to the firm's long-term success. Mr. Mayo based his claim on the 'Capital expenditures on premises and equipment' line in the
Consolidated Statement of Cash Flows.  Mr. Mayo is incorrect in his assertions. In fact, the recent reduction in the capital expenditures to $1.1 billion in 2009 reflects Citi becoming a more efficient firm.  During 2006-08, we
committed the resources to build several large data centers as part of a strategy to centralize our technology. That "large ticket" spending is now completed and we are concentrating on developing platforms that support our
global businesses instead of continuing the past practices of having platforms built for each local business.  We have reduced our real estate costs by leasing more and buying less; put in place stringent cost controls; and reduced our headcount by 110,000 people -- all of which helped reduce our expenses by $11 billion last year.

 "Mr. Mayo has also asserted that Citi's discussion of our future growth prospects is a source of concern.  According to Mr. Mayo, Citi will be tempted to take inappropriate short-term risk to meet what he describes as a growth target.  Again, we disagree with his conclusion.  Citi remains very comfortable with its previously disclosed future growth expectations that were first stated by CEO Vikram Pandit on March 11 at the Citi Financial Services Conference.  Mr. Pandit said: "Over time, we believe that a compound annual growth rate for
these assets [in our core Citicorp businesses] of around 5% is not unreasonable, particularly given our growth opportunities in emerging markets."
We believe this comment on future growth is prudent and reflects the uniqueness of our global footprint, which we believe to be a source of significant future growth.  For example, approximately one-third of Citicorp's assets are in emerging markets, where GDP growth is expected to be 2-3 times that of developed economies.  Citi believes providing management's perspective about our long term growth prospects is helpful to investors and is in line with industry practice.  Mr. Mayo's assertion that our providing this perspective will somehow encourage inappropriate risk taking does not add up.

 "In summary, and as Mr. Pandit and Mr. Gerspach noted in the meeting, Citi continues to make steady progress in 2010. Despite a challenging market environment, we have earned $7.1 billion in net income year to date.  Our
capital strength remains very strong with a Tier 1 Capital Ratio of 12.0%, one of the highest ratios amongst our peer group. We have also continued to make progress on Citi Holdings, which we are unwinding in an economically rational way -- these assets made up less than 25% of our balance sheet as of June 30 -- and we expect them to be less than 20% by year-end with the sale of The Student Loan Corporation.  Throughout Citi, we are executing our strategy to serve our clients with a singular focus on our three core businesses - Transaction Services, Securities and Banking, and Regional Consumer Banking - while taking advantage of our global footprint and ability to innovate."

The Revolving Door

Thought folks might enjoy this:

The Revolving Door