WFC - Wells Fargo

[Spekulatius]

 

 

The key here is that independent dealers mostly sell used cars as is noted in the article and used car prices have plunged.

 

Anyhow, I thought the cap was temporarily lifted?

 

My twitter sources (I know I know) indicate that used car prices have strongly bounced back after an initial slump in March and early April. Shortage of inventory, especially regarding trucks.

[meiroy]

 

 

The key here is that independent dealers mostly sell used cars as is noted in the article and used car prices have plunged.

 

Anyhow, I thought the cap was temporarily lifted?

 

My twitter sources (I know I know) indicate that used car prices have strongly bounced back after an initial slump in March and early April. Shortage of inventory, especially regarding trucks.

 

That's great, It means demand is out there.  Could you provide a link?

 

Edit: here's one:

https://www.autorentalnews.com/358893/wholesale-optimism-used-vehicle-prices-up-5-74-in-may#:~:text=Over%20the%20first%2015%20days,day%20and%20averaged%20above%20101%25.

 

"Wholesale used vehicle prices (on a mix-, mileage-, and seasonally adjusted basis) increased 5.74% comparing the first 15 days of May to the month of April, according to data published by Manheim today.

 

This brought the mid-month Manheim Used Vehicle Value Index to 133.0, a 4.8% decrease from May 2019.

 

Manheim Market Report (MMR) prices improved over the last two weeks, resulting in a 2.1% cumulative increase in the first two weeks of May on the Three-Year-Old Index. Over the first 15 days of May, MMR Retention, which is the average difference in price relative to current MMR, was above 100% for all but one day and averaged above 101%.

 

The MMR Retention trend reflected that vehicles were selling above current MMR values and was a clear reversal of what happened in late March and April."

 

And:

https://nymag.com/intelligencer/2020/05/how-will-hertzs-bankruptcy-affect-the-car-industry.html

 

"The bankruptcy filing has started a 60-day clock, during which Hertz’s secured lenders must wait before they can foreclose on the 400,000 U.S. cars that were financed through such arrangements. It is possible that during the 60 days, Hertz and its creditors will work out a deal that forestalls that foreclosure. Hertz has unsecured lenders who depend on Hertz’s future revenues to be repaid, and who will be screwed if the secured lenders liquidate so much of the company’s vehicle fleet, so there will be a complex negotiation. But such a deal is still likely to involve the liquidation of a substantial portion of those 400,000 vehicles,"

 

So, there's definitely uncertainty in this area if other companies go BK, or people don't get their job back and start selling their cars etc.

[gfp]

I have heard the same thing about used vehicle pricing recovering quickly.  At first during the complete shut down (most dealers were not shut down, auto service is essential) many dealers were caught with too much inventory financed by their floorplan lenders.  Prices dropped quickly during that short time.  The auto auction networks were frozen for a little while - a vital part of the system.  They are mostly back but online now.  I was in the market for a specific used vehicle and watched closely.  By the week before Memorial Day, dealers were already starting to raise prices on used vehicles.  I am told that it is a combination of supply constraints on certain models of new vehicles, more people looking for used vs new despite the 0% offers for new cars, and the general economy not getting nearly as bad as many feared.  My most economically vulnerable friends are making more money per week on unemployment than they made before the pandemic.  Even self employed and independent contractors are being paid $700-$1000 per week in my state.  The amount is higher in other states.  We'll see where the economy goes from here - but the government just sprayed so much cash at this problem that so far it is working...  I purchased my used vehicle the week before Memorial Day weekend.

[meiroy]

https://www.calculatedriskblog.com/2020/06/mba-mortgage-applications-decreased.html

 

"... The Refinance Index decreased 9 percent from the previous week and was 137 percent higher than the same week one year ago. The seasonally adjusted Purchase Index increased 5 percent from one week earlier. The unadjusted Purchase Index decreased 7 percent compared with the previous week and was 18 percent higher than the same week one year ago."

[Spekulatius]

 

 

The key here is that independent dealers mostly sell used cars as is noted in the article and used car prices have plunged.

 

Anyhow, I thought the cap was temporarily lifted?

 

My twitter sources (I know I know) indicate that used car prices have strongly bounced back after an initial slump in March and early April. Shortage of inventory, especially regarding trucks.

 

That's great, It means demand is out there.  Could you provide a link?

 

Edit: here's one:

https://www.autorentalnews.com/358893/wholesale-optimism-used-vehicle-prices-up-5-74-in-may#:~:text=Over%20the%20first%2015%20days,day%20and%20averaged%20above%20101%25.

 

"Wholesale used vehicle prices (on a mix-, mileage-, and seasonally adjusted basis) increased 5.74% comparing the first 15 days of May to the month of April, according to data published by Manheim today.

 

This brought the mid-month Manheim Used Vehicle Value Index to 133.0, a 4.8% decrease from May 2019.

 

Manheim Market Report (MMR) prices improved over the last two weeks, resulting in a 2.1% cumulative increase in the first two weeks of May on the Three-Year-Old Index. Over the first 15 days of May, MMR Retention, which is the average difference in price relative to current MMR, was above 100% for all but one day and averaged above 101%.

 

The MMR Retention trend reflected that vehicles were selling above current MMR values and was a clear reversal of what happened in late March and April."

 

And:

https://nymag.com/intelligencer/2020/05/how-will-hertzs-bankruptcy-affect-the-car-industry.html

 

"The bankruptcy filing has started a 60-day clock, during which Hertz’s secured lenders must wait before they can foreclose on the 400,000 U.S. cars that were financed through such arrangements. It is possible that during the 60 days, Hertz and its creditors will work out a deal that forestalls that foreclosure. Hertz has unsecured lenders who depend on Hertz’s future revenues to be repaid, and who will be screwed if the secured lenders liquidate so much of the company’s vehicle fleet, so there will be a complex negotiation. But such a deal is still likely to involve the liquidation of a substantial portion of those 400,000 vehicles,"

 

So, there's definitely uncertainty in this area if other companies go BK, or people don't get their job back and start selling their cars etc.

 

This guy seems credible based on his posting history. I don’t know his sources,but he is worth a follow:

https://twitter.com/druizg80/status/1268199154683006976?s=21

[ratiman]

Have the repossessions hit the used market yet? It's been about 50 days since Tom Hanks announced CV so that doesn't seem like enough time for the supply to hit the market. I don't know if those repossessed cars are numerous enough to move prices but the current supply demand will probably look very different in a few months. Something like 1/3 of CACC loans are delinquent.

[arcube]

Interesting take on CLOs especially on WFC's books.

 

https://www.theatlantic.com/magazine/archive/2020/07/coronavirus-banks-collapse/612247/?utm_source=pocket-newtab

[ERICOPOLY]

Interesting take on CLOs especially on WFC's books.

 

https://www.theatlantic.com/magazine/archive/2020/07/coronavirus-banks-collapse/612247/?utm_source=pocket-newtab

 

this appears to be where it addresses the risk to the banks from CLOs (bold emphasis added):

 

Defenders of CLOs say they aren’t, in fact, a gamble—on the contrary, they are as sure a thing as you can hope for. That’s because the banks mostly own the least risky, top layer of CLOs. Since the mid-1990s, the highest annual default rate on leveraged loans was about 10 percent, during the previous financial crisis. If 10 percent of a CLO’s loans default, the bottom layers will suffer, but if you own the top layer, you might not even notice. Three times as many loans could default and you’d still be protected, because the lower layers would bear the loss. The securities are structured such that investors with a high tolerance for risk, like hedge funds and private-equity firms, buy the bottom layers hoping to win the lottery. The big banks settle for smaller returns and the security of the top layer.

 

 

The article calls into question statements from Mnuchin-Powell that the risk from CLOs is outside the banking system.  That view is largely consistent with the article's statement that the banks own the top layer of CLOs.

[A_Hamilton]

Interesting take on CLOs especially on WFC's books.

 

https://www.theatlantic.com/magazine/archive/2020/07/coronavirus-banks-collapse/612247/?utm_source=pocket-newtab

 

this appears to be where it addresses the risk to the banks from CLOs (bold emphasis added):

 

Defenders of CLOs say they aren’t, in fact, a gamble—on the contrary, they are as sure a thing as you can hope for. That’s because the banks mostly own the least risky, top layer of CLOs. Since the mid-1990s, the highest annual default rate on leveraged loans was about 10 percent, during the previous financial crisis. If 10 percent of a CLO’s loans default, the bottom layers will suffer, but if you own the top layer, you might not even notice. Three times as many loans could default and you’d still be protected, because the lower layers would bear the loss. The securities are structured such that investors with a high tolerance for risk, like hedge funds and private-equity firms, buy the bottom layers hoping to win the lottery. The big banks settle for smaller returns and the security of the top layer.

 

 

The article calls into question statements from Mnuchin-Powell that the risk from CLOs is outside the banking system.  That view is largely consistent with the article's statement that the banks own the top layer of CLOs.

 

The blog post linked below is an excellent response to Partnoy's article. It's a shame that The Atlantic published this. It is exceptionally hyperbolic and not even in the ball park of accurate in terms of systemic risk.

 

https://nathantankus.substack.com/p/is-there-really-a-looming-bank-collapse

[ERICOPOLY]

Interesting take on CLOs especially on WFC's books.

 

https://www.theatlantic.com/magazine/archive/2020/07/coronavirus-banks-collapse/612247/?utm_source=pocket-newtab

 

this appears to be where it addresses the risk to the banks from CLOs (bold emphasis added):

 

Defenders of CLOs say they aren’t, in fact, a gamble—on the contrary, they are as sure a thing as you can hope for. That’s because the banks mostly own the least risky, top layer of CLOs. Since the mid-1990s, the highest annual default rate on leveraged loans was about 10 percent, during the previous financial crisis. If 10 percent of a CLO’s loans default, the bottom layers will suffer, but if you own the top layer, you might not even notice. Three times as many loans could default and you’d still be protected, because the lower layers would bear the loss. The securities are structured such that investors with a high tolerance for risk, like hedge funds and private-equity firms, buy the bottom layers hoping to win the lottery. The big banks settle for smaller returns and the security of the top layer.

 

 

The article calls into question statements from Mnuchin-Powell that the risk from CLOs is outside the banking system.  That view is largely consistent with the article's statement that the banks own the top layer of CLOs.

 

The blog post linked below is an excellent response to Partnoy's article. It's a shame that The Atlantic published this. It is exceptionally hyperbolic and not even in the ball park of accurate in terms of systemic risk.

 

https://nathantankus.substack.com/p/is-there-really-a-looming-bank-collapse

 

This appears to be the rebuttal's main point:

 

Losses from this crisis may lead to “serious deficiencies in capital”, but if they do it will not be because of fancy structured products but the failure of good old-fashioned loans because of a good old-fashioned depression. In fact, it’s likely that collateralized loan obligations made up of the top portion of a portfolio of loans will do the best of any of the Bank’s corporate loans.

[A_Hamilton]

Interesting take on CLOs especially on WFC's books.

 

https://www.theatlantic.com/magazine/archive/2020/07/coronavirus-banks-collapse/612247/?utm_source=pocket-newtab

 

this appears to be where it addresses the risk to the banks from CLOs (bold emphasis added):

 

Defenders of CLOs say they aren’t, in fact, a gamble—on the contrary, they are as sure a thing as you can hope for. That’s because the banks mostly own the least risky, top layer of CLOs. Since the mid-1990s, the highest annual default rate on leveraged loans was about 10 percent, during the previous financial crisis. If 10 percent of a CLO’s loans default, the bottom layers will suffer, but if you own the top layer, you might not even notice. Three times as many loans could default and you’d still be protected, because the lower layers would bear the loss. The securities are structured such that investors with a high tolerance for risk, like hedge funds and private-equity firms, buy the bottom layers hoping to win the lottery. The big banks settle for smaller returns and the security of the top layer.

 

 

The article calls into question statements from Mnuchin-Powell that the risk from CLOs is outside the banking system.  That view is largely consistent with the article's statement that the banks own the top layer of CLOs.

 

The blog post linked below is an excellent response to Partnoy's article. It's a shame that The Atlantic published this. It is exceptionally hyperbolic and not even in the ball park of accurate in terms of systemic risk.

 

https://nathantankus.substack.com/p/is-there-really-a-looming-bank-collapse

 

This appears to be the rebuttal's main point:

 

Losses from this crisis may lead to “serious deficiencies in capital”, but if they do it will not be because of fancy structured products but the failure of good old-fashioned loans because of a good old-fashioned depression. In fact, it’s likely that collateralized loan obligations made up of the top portion of a portfolio of loans will do the best of any of the Bank’s corporate loans.

 

Yes, but I think you have to contextualize. He is saying that if there is a depression bank capital could be in trouble. No problems a recession. 7.5% decline in GDP for full year 2020 would be awful, but is not a depression...banks have a lot of capital.

 

Going to WFC. Wells is problematic because it has no ability to grow or even keep revenue flat in the current environment given the asset cap, has high expenses due to the regulatory burden it has, and then will be losing customers and eventually talent as no one is going to want to bank with a firm that (due to the asset cap) keeps telling clients all of the things they can't do for them. WFC will survive, but it's not in an enviable position and I'd run from the common.

[rb]

I don't think that there's any company out there that is having trouble retaining employees these days.

[Spekulatius]

I don't think that there's any company out there that is having trouble retaining employees these days.

 

I think you are mistaken. I don’t work in finance, but I see pretty regular turnover with engineers, managers and techs. It’s the weirdest recession in have ever seen.

[plato1976]

agree,

so maybe citibank is a better investment at similar valuation

 

Interesting take on CLOs especially on WFC's books.

 

https://www.theatlantic.com/magazine/archive/2020/07/coronavirus-banks-collapse/612247/?utm_source=pocket-newtab

 

this appears to be where it addresses the risk to the banks from CLOs (bold emphasis added):

 

Defenders of CLOs say they aren’t, in fact, a gamble—on the contrary, they are as sure a thing as you can hope for. That’s because the banks mostly own the least risky, top layer of CLOs. Since the mid-1990s, the highest annual default rate on leveraged loans was about 10 percent, during the previous financial crisis. If 10 percent of a CLO’s loans default, the bottom layers will suffer, but if you own the top layer, you might not even notice. Three times as many loans could default and you’d still be protected, because the lower layers would bear the loss. The securities are structured such that investors with a high tolerance for risk, like hedge funds and private-equity firms, buy the bottom layers hoping to win the lottery. The big banks settle for smaller returns and the security of the top layer.

 

 

The article calls into question statements from Mnuchin-Powell that the risk from CLOs is outside the banking system.  That view is largely consistent with the article's statement that the banks own the top layer of CLOs.

 

The blog post linked below is an excellent response to Partnoy's article. It's a shame that The Atlantic published this. It is exceptionally hyperbolic and not even in the ball park of accurate in terms of systemic risk.

 

https://nathantankus.substack.com/p/is-there-really-a-looming-bank-collapse

 

This appears to be the rebuttal's main point:

 

Losses from this crisis may lead to “serious deficiencies in capital”, but if they do it will not be because of fancy structured products but the failure of good old-fashioned loans because of a good old-fashioned depression. In fact, it’s likely that collateralized loan obligations made up of the top portion of a portfolio of loans will do the best of any of the Bank’s corporate loans.

 

Yes, but I think you have to contextualize. He is saying that if there is a depression bank capital could be in trouble. No problems a recession. 7.5% decline in GDP for full year 2020 would be awful, but is not a depression...banks have a lot of capital.

 

Going to WFC. Wells is problematic because it has no ability to grow or even keep revenue flat in the current environment given the asset cap, has high expenses due to the regulatory burden it has, and then will be losing customers and eventually talent as no one is going to want to bank with a firm that (due to the asset cap) keeps telling clients all of the things they can't do for them. WFC will survive, but it's not in an enviable position and I'd run from the common.

[CorpRaider]

I can't simultaneously worry about their assets and capital taking a massive whack because of all the loan charges from the impending depression and also worry about their inability to ramp up lending for the last several years prior to said economic disaster or I will get a nosebleed.  Do you really want to book a bunch of "growth" for the years 2017 through 2020 if you think anything like what you are worried about is going to happen? 

 

They have a lot of expenses to trim even aside from the regulatory burdens.  This week Shrewsberry was already putting people on notice that cuts are coming. 

[TwoCitiesCapital]

I have heard the same thing about used vehicle pricing recovering quickly.  At first during the complete shut down (most dealers were not shut down, auto service is essential) many dealers were caught with too much inventory financed by their floorplan lenders.  Prices dropped quickly during that short time.  The auto auction networks were frozen for a little while - a vital part of the system.  They are mostly back but online now.  I was in the market for a specific used vehicle and watched closely.  By the week before Memorial Day, dealers were already starting to raise prices on used vehicles.  I am told that it is a combination of supply constraints on certain models of new vehicles, more people looking for used vs new despite the 0% offers for new cars, and the general economy not getting nearly as bad as many feared.  My most economically vulnerable friends are making more money per week on unemployment than they made before the pandemic.  Even self employed and independent contractors are being paid $700-$1000 per week in my state.  The amount is higher in other states.  We'll see where the economy goes from here - but the government just sprayed so much cash at this problem that so far it is working...  I purchased my used vehicle the week before Memorial Day weekend.

 

Just keep in mind, unless extended, all of that extra cash ends this month and we'll actually be dealing with the drag of millions of unemployed for the first time since this started. Everything we're seeing now is artificial in that it must end eventually - and the fact that the economy is doing so well right now means that it probably won't be extended like it probably needs to be.

[FCharlie]

I'm not in any way attempting to downplay the negatives here for Wells Fargo. The asset cap. The fact that WFC can't grow to offset falling net interest margins. That WFC is losing customers as they cannot offer them what they need. The need to provision for huge upcoming losses and the fact that WFC isn't even earning their dividend....

 

But the market cap of this company is down by about $200 billion over the last few years from a combination of price declines and buybacks. They still have $2 trillion of assets, and in any decent environment, these assets should allow WFC to earn a 1% ROA.

 

So in spite of all the problems, I see a company trading at about 5X what they will earn when things are back to normal. This doesn't even consider the possibility of actually growing one day or even just getting back to large scale buybacks.

 

Most probably won't agree with me but it sure seems like Wells Fargo is one of the best opportunities out there.

[erdospi]

Please layout how one gets to normalized five times earnings with the NIM compressed for a long period?

[ERICOPOLY]

Please layout how one gets to normalized five times earnings with the NIM compressed for a long period?

 

choice of words mean a lot, but I hope you mean 'if', not 'with'.  At any rate, after hitting record lows and after some ensuing period of time has passed, a period of rising rates has always followed.

 

Let's see what happens to interest rates once we either hit herd immunity or mass vaccine.  We could very well be within 6-18 months of that.  Just the announcement of a vaccine should do quite a bit in forward-looking markets.

[mcliu]

If lending isn't profitable, can/will banks just slow or stop lending and return capital?

[erdospi]

Please layout how one gets to normalized five times earnings with the NIM compressed for a long period?

 

choice of words mean a lot, but I hope you mean 'if', not 'with'.  At any rate, after hitting record lows and after some ensuing period of time has passed, a period of rising rates has always followed.

 

Let's see what happens to interest rates once we either hit herd immunity or mass vaccine.  We could very well be within 6-18 months of that.  Just the announcement of a vaccine should do quite a bit in forward-looking markets.

 

I chose the word with specifically because that’s the likely outcome as people are over levered, we’ve had a supply/demand shock, there is significant excess capacity in most areas: steel, autos, etc.

 

Are saying you want to try to pick a inflection point on rates over almost 40 years? Or are you saying a short term trade on a rate bounce? FED was already cutting rates prior to COVID-19.

 

Rates have been going down, albeit with short term blips, since 1981:

 

https://fred.stlouisfed.org/series/DGS10

 

A vaccine etc is different from loan demand at rates higher than today.  12-18 months can affect human behavior/psychology on spending. I think that assumption is pretty optimistic.

 

I’d love to see a valid argument against the Hoisington points on lower rates or any opinion, excluding the virus even since the FED was lowering rates prior to the virus and loan demand wasn’t robust.

 

This doesn’t include potential CLO problems, off balance sheet risk as the Atlantic piece laid out, or other issues WFC has culturally and compliance...I know they can cut a lot of costs there longer term. I just would like normalized earnings power on NIMs...but the only argument I ever its rates will go back up.  Now the banks have done well for these years while rates fell but it’s significantly harder to make margins now with rates where they are which is why WFC is saying $3B lower NII last week...

[ERICOPOLY]

 

Are saying you want to try to pick a inflection point on rates over almost 40 years? Or are you saying a short term trade on a rate bounce? FED was already cutting rates prior to COVID-19.

 

Rates have been going down, albeit with short term blips, since 1981:

 

https://fred.stlouisfed.org/series/DGS10

 

This has been a long discussion on this board, it's more than a decade old now.  The Fairfax/Hoisington discussions leading up to the collapse of 2008/2009.

 

Then poof and it's gone, and now back again after a few months of a pandemic scare and a forced shutdown.

 

Had rates been coming down independently of the pandemic I would listen harder.  But they've been steadily higher than they are now despite having the biggest housing crash on record -- and consumers suffered a lot from that and in response we had the lowest ever period of unemployment.

[erdospi]

If lending isn't profitable, can/will banks just slow or stop lending and return capital?

 

Look at the loan to deposit ratio for all banks over the past 50+ years the profitability has been decreasing, they have been returning capital (the buybacks may look bad in hindsight) and the population pyramids for countries are not great although the US is better than most (pretty sure the fed cant print people but maybe with 3D printers and some AI). I wouldn’t bet on them being allowed to return capital if they have to absorb any of these losses from the 12-18 month COVID-19 scenario which is likely optimistic or even if the losses don’t occur why would they allow them to return capital when they are holding rates at 0 for 2 years?

[sleepydragon]

Despite all the negative things going on with WFC, its net charge off ratio is still the lowest among the 4 big banks and USB, though not as low as much smaller regional banks.

 

Sure, they can’t grow their loans and they committed frauds, but at least the loan they made are still good quality.

 

[erdospi]

 

Are saying you want to try to pick a inflection point on rates over almost 40 years? Or are you saying a short term trade on a rate bounce? FED was already cutting rates prior to COVID-19.

 

Rates have been going down, albeit with short term blips, since 1981:

 

https://fred.stlouisfed.org/series/DGS10

 

This has been a long discussion on this board, it's more than a decade old now.  The Fairfax/Hoisington discussions leading up to the collapse of 2008/2009.

 

Then poof and it's gone, and now back again after a few months of a pandemic scare and a forced shutdown.

 

I was bearish on the NIMs prior to COVID-19, I just don’t post much.  Please elaborate on how they are wrong I’ve yet to see a valid argument and over that time period what have NIMs done? And what has happened to interest rates?  The data is what it is rated have gone down since 08/09 with short term blips up and banks NIMs have contracted and currently are continue to contract. So going long here are you not betting on that changing? And if so how/why?

 

I’d love to hear a valid counter argument...I’d love to buy the banks here but I can’t see it. I’m probably just not qualified.