Wells Fargo 1q09 results

Overview
Wells Fargo is a diversified financial setvices company with $1.3 trillion in assets (the 4th largest in U.S.) providing banking, insurance, investments, mortgage and consumer finance through more than 10,400 stores, over 12,000 ATMs and internet across North America and internationally.
It has the highest net interest margin among peers (4.16% vs 3.00% in average), it is also the 2nd highest holding in Berkshire Hathaway's equity investment portfolio.

1q09 results (vs 4q08)
1. Revenue (before provision) up 121.8% vs 4q08 to $21.0B

• Revenue increase mainly due to the acquisition of Wachovia in 12/31/08;
• Net interest income (before provision) up 69.2% to $11.4B with the continue improve in interest spread (interest income up 64% while interest expense only up 46.6%)
• Net interest margin down from 4.90% to 4.16%. It drop mainly due to the acquisition of Wachovia (a bank with 3.0% a lower interest margin), but as I mentioned in the bullet (the one above), the interest spread is actually improving if the 4q08 data included the legacy Wachovia and I think it will continue to improve;
• Non-interest income to total revenue (before provision) ratio improve from 29.0% to 45.9%, back to the normal. The 235.1% improve in trust & invest fees income are mainly contributed by Wachovia;
• Efficiency ratio improved from 61.3% to 56.2%, back to normal.

2. Reported EPS up from -$0.84 in 4q08 to +$0.56

• Provision down 46% to $4.6B, thanks to the balance sheet write off done in 4q08 on Wachovia's book, I expect the future provision will not rise back to 4q08's level (given the economy data so far);
• Allowance for credit losses up 20 bps to 2.71% from 2.51% or up 115 bps vs 1q08;
• WFC said start in 2q09, it will save $5B expenses per year due to the merge;
• Commission & incentive expenses up significantly by 171.8% to $1.8B, it may be due to the increase in trust & invest fee's increase. If it is mainly due to bonus paid out, I think it is just too high (have to see how's the trend in 2q & 3q);
• Expenses on core deposit and FDIC also up significantly by 1,276.6% & 528.1%. It tells how expensive it is to keep "excess capital" & to keep a so call "reasonable" capital level, but it is not the way to create wealth and increase earning. It is just a method to keep investors & depositors less worry;
• Return of equity up to 14.49% from -22.32% and consistent with trend

3. Balance sheet

• Total equity up 4.6% to $107.1B a) AOCI net loss down by 47.2% to -$3.6B; b) Common stock & retained earning down 4% mainly due to the $0.34 per share dividend (will cut in 2Q);
• Book value per share up 0.8% to $16.28;
• Total equity to assets ratio up 21 bps to 5.40%;
• Tangible common equity ratio up 42 bps to 3.28%
• Tier 1 capital ratio up 44 bps to 8.28%, lower than its peers but able to pass the federal capital stress test while CitiGroup & Bank of America failed with a higher cpaital ratio. That means WFC's asset quality is better than those big 2;
• On asset side, Although WFC said it has significant credit extended to U.S. taxpayers with $175B loan commitments, $190B mortgage application and $101B mortgage originations, but its loans balance down 2.5% to $844B even thought mortgage balance up 83.2% to $36.8B
• On liabilities side, non-interest bearing deposits up 10.4% and short term borrowing down 33.3, it shows a trend that WFC continue to take the advantage of the financial crisis and recession to increase deposit base (borrow cheaply) and lower ST borrowing (stablize its cash position & funding)

Risk

• Weak economy: if house price continue to fall, unemployment continue to rise, it will trigger the delinquency rate to rise;
• May take a very long time to derive the merge benefit;
• Concerns on WFC's $93.2B pick-a-pay mortgage and Wachovia's $45.3B commercial real estate division
• Business mainly in U.S., which may limit its future growth as lots of its peers turn themselves into a global financial giant.

Bilibala with Wells Fargo

• Wells Fargo has 47 stores in Ontario Canada, and 1 of them is in North Bay. There is another one along Kennedy and Sheppard. I should find sometime to visit or open an account there;

Comments
Buy, fair value $40.70.
Wells Fargo is the well managed and conservative financial institution, it claimed that it always "open for business" who will lent $$ at any time but only to credit worth companies and individuals.