For Wells Fargo, the capital question still looms

Wall Street's debate over Wells Fargo & Co. is whether the bank's capital situation is half full or half empty.

Fittingly, the San Francisco financial giant’s shares on Thursday gave back almost exactly half of their huge gain on Wednesday, which followed the company’s report of a large fourth-quarter loss.

The stock slumped $2.41, or 11.4%, to $18.78, after surging $5 on Wednesday. The financial sector in general also pulled back Thursday after rallying a day earlier.

Despite Wells’ report that it lost $2.6 billion in the fourth quarter -- and that Wachovia Corp., which Wells bought Dec. 31, separately reported a whopping $11.2-billion loss -- Wells’ fans were cheered by the company’s decision to maintain its dividend payout, and by its insistence that it wouldn’t seek more government capital.

In a note titled "The Stagecoach Comes Through," analyst Joe Morford at RBC Capital Markets wrote that despite the bank’s huge boost in loan-loss reserves in the fourth quarter, Wells wound up with about the level of capital, or net worth, that Morford had expected.

That was about 2.8% for the so-called tangible common equity ratio, a strength indicator that bank investors are watching closely. It measures capital relative to total assets.

Tangible common equity excludes capital from the government’s purchase of preferred shares, also known as the TARP bailout. It also disregards other preferred stock, as well as intangible assets such as goodwill. Because tangible common equity is a bank's first defense against losses, weakness there could cost common shareholders their cash dividends.

Now, tangible common equity of 2.8% is not great by any definition, but under the circumstances, Morford wrote, Wells' ability to preserve the ratio at that level was a good thing. He slightly reduced his earnings estimates for 2009 but left intact his "outperform" (buy) rating, on the stock.

Of 23 analysts who cover Wells, 10 now rate the stock a buy, nine rate it hold and just four advise selling the shares, according to Bloomberg News data.

One of the bears is Paul Miller of Friedman, Billings, Ramsey & Co. Miller last week told clients that he believed Wells would be forced to cut its dividend, now 34 cents a share per quarter. He reiterated that view Thursday in a report titled "Losses Pressure Capital; Dividend Cut Is Still Looming."

Miller cut his earnings estimates for Wells more sharply than Morford and kept his "underperform" (sell) rating on the stock, saying that greater-than-expected losses at Wells and Wachovia are "pushing capital levels dangerously lower."

Without the $25 billion in TARP funds Wells got last fall, it wouldn’t be considered "well capitalized" by regulators, Miller said. And he expects the bank to face bigger loan problems in the sinking economy than some other Wall Street analysts are assuming:

Wells has approximately $58 billion of allowance and loan marks to absorb losses. While Wells is better provisioned today than in recent quarters, we expect that the company will have to continue to provision in excess of net charge-offs to maintain an allowance equal to the next four quarters of losses. We model $25 billion of net charge-offs in 2009 and $27.25 billion of provision expense. At these levels, the dividend is not sustainable.

-- E. Scott Reckard

Photo credit: Paul Sakuma / Associated Press

Comments

[a good customer]

I must say that Well Fargo is the worst of them all when it comes to financing mortgages. They don't disclose key issues with there customers, yet they ask key questions before they even want to talk to you. Here is a little story. I got on a temp forbaring plan with wells fargo in an effort to stop paying them a late fee of 30 -50 dollars a mth. I had never been late with my mortgage, nor had I missed a payment, but due to my new job I was now paid on the 1 and the 15 (instead of every 2 weeks). Once I was on this plan, my credit score was a 675 and rising (just got it repaired). After being on this plan, they never told me that they would be reporting me to the credit bureau as late. When I finally found out, I was left with a credit sore of about 515 and dropping. I was furious, but keeping my composure I asked them why didn't they tell me that they would report me late, so I can have an option to go with this plan or not. No one could explain, I was switched around to 8 different departments, and on the phone for hours. Now no other mortgage company will work with me, and they claim I am 2 months behind on my mortgage (where is the extra 111 a month I paid on the plan). Now they want to forclose on me, and it all their fault for not giving me an option. Whats funny I have the ability to pay, but, they want all or nothing. So needless to say, I am contacting the attorney generals office about this one.

[a well educated observer]

Having read the above comment, I am forced to exhibit disbelief that this mortgage holder was "unaware" that a Temporary Forbearance Agreement is in fact an agreement that a borrower would only enter into should they become delinquent on their payments. This agreement, to the letter, is a short term payment plan agreed upon by the borrower and the lender to forstall forclosure proceedings that would result from continued delinquency. The reporting to the credit agency (while not necessarily fair in all cases) is a condition of entering into a TFA. Furthermore, as it is an instrument only introduced should the borrower already be delinquent, the reporting to the credit agency should not only be expected, but is fair play.

[WellsFargovian]

I wish people would just pay their mortgages and take responsibility for the committments they made... AND not be held un-responsible for committing to mortgages they could not afford... were that the case we wouldn't be in this jam.

[Al]

Mr. Wellsfargovian and all the people that had their minds conditioned by big banks and the failed financial system. Let me tell you what the banking industry did. I will tell you a story so you can understand:
A teacher went to his kindergarten class with a full box of candy. He opened the box and let the children eat as much as they could. Children are children and they ate candy as much as they could. As you know eventualy some children develop cavities, others gain weight others got very hyper and some got diabetes, they lost their health.
Well by now you should have guessed that the teacher is the banking industry, the children are the borrowers, the candy is easy mortgage money and health is homes.
You can not ask children to think the consecuences of overeating candy. Even if they do it is the teacher giving it to them, then it must be right. Borrowers are not experts in finance, banks are. If a bank approves a loan they should know that it is good for the borrowers and them. Or so many borrowers thought when suckered into loans they eventually could not afford. Who is to blame, children or the teacher? Hopefully now you get it.
Instead of giving moral advise to our fellow neighbor, we all should help them fight the banks. People losing homes will eventually hurt everybody, including those giving the banking industry conditioned advice.

[Rachel Miles]

Wells Fargovian,

I am appalled at your lack of intelligence, judgmental attitude, and willingness to condemn that which you have little to no knowledge about. Not all delinquencies are created equal. God forbid you ever be in the position of losing your job with out prospects for the future and no way to pay the commitment you willing entered into with GOOD FAITH and a good income. I shall also pray forth that you have no sudden illness that prevents you from working and keeping up your commitments. I hope that you could still your tongue, and conger some compassion for those less fortunate than your appear to be. While I agree that many loans that have been are suspect at best, the fact remains that mortgage companies were not forced to complete them. They did so willing, even when the terms and documents were ridiculous.