WFC - Wells Fargo

[Viking]

As expected, Euro banks are selling risk assets and WFC is buying. High supply and low demand should mean very attractice prices. Another recession may result in the (relatively) healthy banks growing substantially by buying assets at firesale prices. As Buffett once commented (I think), WFC management must feel like an undersexed male in a brothel.

 

http://www.bloomberg.com/news/2011-11-25/bank-of-ireland-said-to-near-sale-of-burdale-lending-unit-to-wells-fargo.html?cmpid=yhoo

[Uccmal]

Viking,  do you mean Oversexed, by any chance?  ;)

[Liberty]

http://online.wsj.com/article/BT-CO-20111128-711394.html

[txlaw]

http://online.wsj.com/article/SB10001424052970204826704577074291361796220.html

[racemize]

anyone know what this 2% run up is from? 

 

Edit: perhaps because it was not downgraded like the rest of the banks?

[Arden]

There are no reasons in the stock market, only pain.

[racemize]

anyone have any strong opinions on the shareholder votes/directors?  I'm reading through the material now, but if anyone's already given it some thought, please post!

[Rabbitisrich]

NEW YORK (Dow Jones)--Wells Fargo & Co.'s (WFC) top two executives kicked off their investor day by reassuring Wall Street that Wells Fargo is a more stable and less risky company than other big banks.

  "You can't take outsized risk in the financial services industry," Chief Financial Officer Timothy Sloan told investors assembled here Tuesday morning, just over a week after J.P. Morgan Chase & Co. (JPM) reported that a bet on credit default swaps went badly wrong. "We have less risk than our peers."

  Chief Executive John Stump said part of Wells Fargo's culture is to be "willing to say, 'I don't understand this, I won't do this'."

  Wells Fargo, the nation's fourth-largest bank by assets, has taken the kind of risk that the nation's largest bank, J.P. Morgan, did: Hedging certain business through trading products including credit default swaps. And Wells Fargo has gained and lost billions through hedging--but results came in largely as planned to offset gains and losses in the value of mortgage servicing rights.

  There aren't any macro hedges at Wells Fargo, Chief Risk Officer Mike Loughlin said. "We either buy securities or don't," but don't buy securities and then hedge them.

  "We do not do any centrally directed portfolio hedges," he said.

  Asked whether Wells Fargo has something like a chief investment office, the unit responsible for J.P. Morgan's hedging loss, Loughlin simply said, "No."

  Sloan told investors Tuesday that Wells Fargo had drastically reduced its exposure to credit default swaps over the last three years. "Credit default swaps are in the news," he said, with an eye on J.P. Morgan's $2 billion estimated second-quarter hedging loss. "Three years ago our credit default swaps [were] much too large, and it is now about a quarter of what it was three years ago."

  Mike Heid, the head of home lending, said that hedging mortgage servicing rights is "a critical capability" any bank has to have. "That said, it's not a trading activity. It is not trading in any shape or form," he added.

  At Wells Fargo, hedging mortgage servicing rights isn't part of the investment portfolio of the bank, but is done within the mortgage business to keep hedging closer to the underlying assets that are the cause of the change in the value of servicing rights, namely interest rates and mortgage refinancings.

  Wells Fargo calls the relationship between interest rates and mortgage refinancing, and the value of mortgage servicing rights a "natural hedge." When rates fall, Wells Fargo originates refinance mortgages and the value of servicing rights decline.

  CFO Sloan, meanwhile, raised the bank's return targets: The goal is now to eventually generate a return on assets of as much as 1.6% once the economy returns to health. At its investor day three years ago, Wells Fargo said it targets an ROA of 1.5%. But in the currently slow growth environment, the ROA will come in toward the middle of the bank's target range of 1.3% to 1.6%, he said.  The bank targets returns on equity between 12% and 15%, Sloan said.  Treasurer Paul Ackerman said the bank may return between 50% and 65% of its earnings to shareholders in form of share buybacks and dividends and retain the rest for investments in growth, mainly organic, as many heads of Wells Fargo's lines of business outlined in their presentations during the day.  The CFO reiterated that the bank needs to bring expenses down to reach a 55% to 59% efficiency ratio--the ratio of how much a company spends for each dollar it earns. "We feel good about" hitting that target, though he didn't explicitly state a timeline. Wells Fargo plans to reach its goal of $11.3 billion of expense in the fourth quarter, down from almost $13 billion in the first quarter.  He also reiterated Wells Fargo's appetite to buy businesses, but remained vague about what the bank might acquire next: "We look for good business to buy that we understand," he said. But investors shouldn't count on massive reductions of Wells Fargo's reserve for loan losses to pop up earnings. Chief Risk Officer Loughlin said "it was painful to build them...we don't want to give them away easily." Wells Fargo wants to keep reserves "at very, very high levels."  -By Matthias Rieker, Dow Jones Newswires; 212-416-2471; matthias.rieker@dowjones.com

[Kiltacular]

Just to add an important point from the investor day:

 

#1:  While targeting a 12 to 15% ROE, much more importantly, they expect a 15 - 19% return on tangible equity. 

 

--

 

My feeling has been -- and continues to be -- that once the election is over (no matter the winner) much of the negative regulatory headwinds will dissipate.  The banks will likely be out of the headlines, out of the news, etc., etc.

 

If we ever get the economy really growing again, I still feel that the big banks -- esp. BAC, JPM and Wells -- will show enormous growth.

[Parsad]

Just to add an important point from the investor day:

 

#1:  While targeting a 12 to 15% ROE, much more importantly, they expect a 15 - 19% return on tangible equity. 

 

--

 

My feeling has been -- and continues to be -- that once the election is over (no matter the winner) much of the negative regulatory headwinds will dissipate.  The banks will likely be out of the headlines, out of the news, etc., etc.

 

If we ever get the economy really growing again, I still feel that the big banks -- esp. BAC, JPM and Wells -- will show enormous growth.

 

They are already there.  Investors just don't know it yet.  Continued recovery in housing will generate more confidence in other sectors, including consumer spending and business hiring.  Cheers!

 

http://finance.yahoo.com/news/fdic-bank-profits-highest-level-140004456.html;_ylt=Ara_C4EUxvKHZ80YnblIghCiuYdG;_ylu=X3oDMTQ0cmJvZ3RvBG1pdANGaW5hbmNlIEZQIFRvcCBTdG9yeSBSaWdodARwa2cDNjA0MzgxZWUtNGYxNy0zNzBkLWFkMjItZjYzMzA1ZjA3YjJkBHBvcwM4BHNlYwN0b3Bfc3RvcnkEdmVyAzgzYjE1ZGYwLWE1YWQtMTFlMS1iZmNlLWYzNTRhZTVhNzY3ZQ--;_ylg=X3oDMTFpNzk0NjhtBGludGwDdXMEbGFuZwNlbi11cwRwc3RhaWQDBHBzdGNhdANob21lBHB0A3NlY3Rpb25z;_ylv=3

[Kiltacular]

They are already there.  Investors just don't know it yet.  Continued recovery in housing will generate more confidence in other sectors, including consumer spending and business hiring.  Cheers!

 

Yes!...agree Parsad.  I left out an important part of the comment which was (paraphrasing here) that those should be the returns on tangible equity assuming the most onerous capital requirements that might be put forward. 

 

Recall that in June (?) of last year, some Fed banker stepped forward and suggested that capital requirements would be huge for the big banks -- the bank stocks tanked.

 

That has faded away. 

 

In the last (IIRC) conference call, Wells said something about how their SIFI buffer would -- at most -- be 1%, "if that" or "if there's one at all". 

 

So, if Wells is required to hold 7% capital and can get a 1.6% ROA (in a normalized interest rate environment -- see investor day), that could be a reported ROE of well over 20% (return on tangible would be higher still, of course).

 

If they're required to hold, say, 8.5% and get a 1.3% ROA (their low end ROA), that would be a reported ROE of 15%.

 

So, their "targeted" ROE target of 12 to 15% seems very conservative.  It fits with my general feeling that banks are lying low in this election year.  They're not going to tout big returns or do anything else (except on accident -- see JPM) that draws attention (especially to their upside).

 

This is where I agree with you about what investors are missing.  Investors aren't used to companies playing things down.  But, think about it!

 

Goldman does not want headlines about it's huge bonuses or enormous average salaries per employee in an election year -- not after what they've seen the last few years.

 

Wells, as you note, is already producing huge returns.

[Arden]

In the last year the stock has risen from about 29 to above 33, while the warrant dropped from 9.7 to 8.8.  The required return to break even has fallen from 8.5% to just 5.2%.

 

For context, you can look at the options for january 2014. these trade around 3.7$, with a strike of 35$, a dollar above the warrant, and expire 1.5 years from now(almost exactly :) ) ,  while the warrants have more than 4 times as much time- 6.3 years, and trade for less than twice as much as the options.

 

Heck, it's reaching a point in which inflation alone is almost enough, not to mention the average return on stocks or the average return WFC has achieved.  weird.

[Arden]

Does anyone know if WFC is still buying back warrants?

[jose]

They didn't mention it in the Q2 conference call. I'm still waiting on the 10-Q to show-up in edgar, and that will be one of the things I'll look for.

 

In the Q1 report (page 42), they note they've purchased 71M of the original 110M warrants so far, and they have $453M left to buy more warrants.  That means they could theoretically purchase the rest of those 40M warrants at current prices, if volume allowed. But I'm not selling them mine. Ha.

 

 

[racemize]

They didn't mention it in the Q2 conference call. I'm still waiting on the 10-Q to show-up in edgar, and that will be one of the things I'll look for.

 

In the Q1 report (page 42), they note they've purchased 71M of the original 110M warrants so far, and they have $453M left to buy more warrants.  That means they could theoretically purchase the rest of those 40M warrants at current prices, if volume allowed. But I'm not selling them mine. Ha.

 

please update us when you get to look at the 10-Q.  I have a feeling that the last set of warrants may not be easy to repurchase, e.g., from you and a bunch of other value investors.  :0.

[Arden]

I've just thought of something. The company has obviously decided to buy back a lot of warrants. Why would it do that instead of buying shares? every investor is looking at buybacks and dividends, why return money by buying back warrants?

 

Maybe, just maybe, someone in charge decided they don't want anything which has the words "troubled asset relief" and WFC on it, in existence. Maybe the reason is more to do with cleaning up the company's reputation and forgetting all about the mess from a few years ago than just returning money.

 

If so, would they really care if they buy back at 8,9, or 12$? But, obviously they cannot announce it.

 

I believe that if it turns out that the company has still bought back warrants this quarter, we are in a very special situation here.

[Rabbitisrich]

I've just thought of something. The company has obviously decided to buy back a lot of warrants. Why would it do that instead of buying shares? every investor is looking at buybacks and dividends, why return money by buying back warrants?

 

 

Not sure about 2Q12, but WFC didn't repurchase any warrants in 1Q. Unfortunately, the primary return of shareholder money is in the form of dividends. Stock buybacks are simply supplying shares for compensation.

[Rabbitisrich]

http://blogs.wsj.com/deals/2012/07/26/wells-fargo-architect-kovacevich-says-big-banks-are-safer/

 

Some good points raised, although I disagree with his overall point.

 

“What is the risk of underwriting debt, underwriting equity, and providing [merger and acquisition] advise? There is no risk,” Kovacevich said. ”Do you know how risky commercial lending is? Traditional investment banking is less risky than commercial and consumer lending. Exclamation point.”

[jose]

They purchased 35k warrants at an average price of $8.32 in June (page 157 of 10q).

 

A small purchase, but they are constrained by low volume. 

 

Interesting to see that a) they are still actively looking at these and b) at what price they started buying them back up, which not-so-coincidentally was near bottom.

 

 

 

[meiroy]

"In connection with our participation in the Capital Purchase Program (CPP), a part of the Troubled Asset Relief Program (TARP), we issued to the U.S. Treasury Department warrants to purchase 110,261,688 shares of our common stock with an exercise price of $34.01 per share expiring on October 28, 2018. The Board authorized the repurchase by the Company of up to $1 billion of the warrants. On May 26, 2010, in an auction by the U.S. Treasury, we purchased 70,165,963 of the warrants at a price of $7.70 per warrant. We have purchased an additional 951,426 warrants since the U.S. Treasury auction. At June 30, 2012, there were 39,144,299 warrants outstanding and exercisable and $452 million of unused warrant repurchase

authority. Depending on market conditions, we may purchase from time to time additional warrants in privately negotiated or open market transactions, by tender offer or otherwise."

 

Just for fun: 452,000,000 / 39,144,299 =11.5470

 

 

[Arden]

Wow, thanks meiroy, that's really interesting.

 

My guess is when you're tasked with making the TARP warrant disappear from the market and you're 65% done, You're gonna finish your job. I feel almost like I've been given insider information :)

[Arden]

Thinking about it some more and looking at the prices at which they bought, it is possible they have a rule- only buy when price is below what Black Scholes model suggests. Otherwise, their average price is quite remarkably low.

[Uccmal]

The average price is very low.  The quote is 10.16.  I plan on holding mine indefinitely.  There must be others who are doing the same.  If they plan onbuying them all in they will have to tender at a good premium to get me to sell - at least a 30% premium. 

[Arden]

If so, they will only make the offer after they've bought as much as they can, so only the truly hardcore long term holders might enjoy such an offer. I think the tender offer they make will depend on the number of warrants they manage to buy until it gets too hard and the change they have from the original 1 B$

[meiroy]

 

Is it possible to short the WFC warrants? If so, where could one see the relevant data? Thanks.