Everybody seems to have made a big deal of the fact Wells Fargo’s (NYSE:WFC) fourth-quarter results far exceeded analysts’ expectations. But I’m not that convinced by them, as they generate some questions that will need to be answered before I’m persuaded it was from operational excellence. We’ll get into that a little later in the article. First the results.
What caused a big stir was the profits generated in the quarter of $2.82 billion, which came to 8 cents a share. Analysts were looking for a loss of 1 cent a share, making it look like a blockbuster performance for the quarter for Wells Fargo. Last year during the same period the company lost $2.55 billion or 79 cents a share.
Revenue also came in at record levels, with the company recording $22.7 billion, and annualized increase of 4 percent over the previous quarter.
That isn’t that impressive though, as it for the most part came from the acquisition of Wachovia and not from organic growth. For the year Wells had a net profit of $7.99 billion on $88.7 billion in revenue; also a record, but also related to the Wachovia acquisition.
This isn’t to say we shouldn’t take into account Wachovia’s performance, as it’s now part of Wells Fargo, just at this stage it is meaningless as far as the numbers go because it has nothing to do with performance but simply the additional size of Wachovia being added to Wells Fargo. Next year it’ll have more meaning because the performance of the company itself will be measured and not simply the one-time growth enjoyed from adding its numbers to Wells Fargo’s numbers.
Now the fourth-largest bank in America, the company said they now hold $1.2 trillion in assets as of the end of 2009.
So other than acquiring Wachovia, what was the real performance of Wells Fargo in the fourth quarter?
The news actually wasn’t that good in their core business, as the number of bad loans on their books continue to increase, growing by 6 percent from the third quarter, now standing at $5.4 billion. Those loans becoming uncollectible grew by close to 18 percent from the third quarter to a huge $27.6 billion. Much of that will get worse as the year goes on, as commercial loans continue to default at a huge rate for the company, and is expected to peak in the latter part of 2010 for all the banks with large exposure in that sector.
Concerning the mortgage business in general, they fell by almost 30 percent in the U.S. in the fourth quarter from the quarter before, which consequently had a detrimental effect on the number of home loans offered by Wells Fargo during that time. For those that did refinance or took out a mortgage, the bank did attach higher fees to generate more revenue.
One strange part of Wells Fargo’s revenue continues to be the income it is garnering from hedging, which is unusual in the industry to say the least, and has now become a factor in the last couple of quarters. This quarter they had gains of $2.1 billion, while last quarter it stood at $1.5 billion. The hedging is said to be part of the mortgage-servicing unit. This could come under more scrutiny because it’s highly unusual for these types of gains to come about from the mortgage-servicing unit of a company.
Some seemingly legitimate good news from the company says the performance of its option-ARM mortgages are stronger than anticipated, and won’t cost the company as much as originally believed.
Other good news for the company which is measurable is on average the checking and savings deposits for the company grew to $661 billion in the fourth quarter, a surge of 20 percent from quarter three.
I’m actually a little concerned about Wells Fargo, and have been for some time. They’ve largely been ignored by the mainstream media as far as negative reporting, while most of the other major banks have been getting hit hard by them. There’s a possibility of the Warren Buffett factor there, but after he hit out against the Obama tax on the banks, we’ll see if that honeymoon continues to be bliss or not.
What is worrisome is if we’re getting an accurate picture of the company, as their core business seems to be devasted, yet reports are acting like it’s the strength of the company going forward. Somewhere there’s a disconnect, and whenever that happens, red flags should be raised.
Add to that the fact that much of their operations are in California, and it’s hard to believe they’re acting like they’ve turned the corner on mortgage defaults.
The Wells Fargo story is just sounding too good to me, and I think when we see how it plays out in 2010 that the underlying fundamentals of the company may not be as strong as being portrayed. I’m more cautious with them than any other large bank out there at this time.
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