Wells Fargo (WFC) shares went crazy yesterday, bringing the rest of the sector along for the ride, after pre-announcing very strong Q1 earnings.
That the bank could show such impressive record results almost seemed too good to be true, given how badly the economy continues to perform.
Some are openly sceptical of the numbers, on the grounds that Wells is under-reserving capital against future losses:
CNBC’s Fast Money crew was quick to gloat over the positive results for WFC on air Wednesday, however, poking fun at FBR Capital Markets analyst Paul Miller, who had recently been a guest and recommended shorting Wells Fargo stock over the bank’s exposure to souring loans. “He [Miller] wasn’t wrong, he was 27 per cent early,” cracked Jeff Macke of Minyanville.com and a regular Fast Money panelist, referring to the bounce in WFC’s shares in Wednesday trading.
Of course, one day of trading does not a trend make.
“We believe that credit quality materially deteriorated in the first quarter, and that Wells Fargo is under-reserving for expected future losses,” FBR’s Miller wrote in a Wednesday research brief. “We reiterate our Underperform rating.”
More questions from Miller: “[W]e remain cautious based on what we don’t know. Most importantly, what happened to nonperforming loans and what would have been net charge-offs excluding purchase accounting adjustments? What are the trends in WFC’s Option ARM portfolio? Did the company write up the MSR and what was the new capitalised cost of servicing? Was there any benefit from an increase in level 3 assets given recent accounting guidance?” Read the whole thing >
Miller wasn’t the only one to think the pre-announcement raised more questions than answers.
Betsy Graseck of Morgan Stanley noted in a research report today that there is still a debate over Wells Fargo’s capital. “Investors are concerned about how WFC will fare in the stress test given its residential mortgage concentration. We do not bake in a capital raise but would not be surprised if WFC proactively raised capital to take this issue off the table.”
Ramsden of Goldman Sachs noted that Wells Fargo is still thoroughly under the government’s thumb unless it can pull off another rich stock offering. “On capital, Wells Fargo expects [tangible common equity] ratio to improve to above 3.1% in 1Q. This is clearly a positive although we would note that Tier 1 ratio excluding TARP is still likely to be around 6%, which would make it hard for Wells Fargo to disentangle from the government without a capital raise.”