Thursday, July 23, 2009

More on Wells Non Performing Assets.

This is a continuation of my Wells piece from yesterday.

Wells dropped some 3.5% yesterday, bucking the trend for most banks. The reason was they reported a 45 percent increase in nonperforming assets to $18.3B in the April-June period from the prior quarter, with double digit increases in many loan portfolios.

Most of the weakness came from commercial loans and commercial real estate loans, where loans not generating payments jumped 69%.

Strange day indeed as Wells dropped yesterday even as shares rose for several banks that also reported higher loan losses.

Please read my piece about the positive spin that investors are taking on the banks.

I don't accept investors enthusiasm because loan/mortgage/credit, and Real estate fundamentals will continue to deteriorate and values will continue to decline. On the CRE side, vacancies and rents both reflect the damage that's already being inflicted by the economy, and further damage that's likely still to come.

Please read this piece from the NY Times.

As well as various posts on CRE.

Wachovia acquisition had many benefits, but non performing loans from Wachovia side soared 145% to $5.57B while pre-merger Wells rose 24% to $12.8B.

But of course Wells is downplaying the credit erosion, stating that they have already taken some $23.5B in reserves for bad loans. But what is worrisome is commercial loan deterioration was broad based, and not concentrated in states particularly hard-hit by the recession.

"Commercial borrowers are seeing their businesses suffer because of the economy, and eventually, they will run out of cash and go to nonperforming status. The qualification I would give is that we believe that the level of losses in the commercial portfolio are relatively low by historical standards". This is not my statement...its Wells CFO.

As previously stated Wells has taken $25B in bailout money, on top of that they have raised some $13.7B via secondary offerings and other measures. They would definitely need to raise potentially tens of billions more when they repatriate bad loans sitting on SPV/OBS by year end.

Why isn't Wells CEO on TV every day complaining that his company doesn't need TARP money anymore like he was doing before? The government has already alerted Wells that they cant pay back TARP until they raise significant amounts of additional cash.

U.S, Commercial Banks like Wells hold about $1.7T, or half, of outstanding commercial mortgages in the country, but their exposures vary widely. Indeed, among banks with more than $50 billion in assets, Wells Fargo has one of the smallest concentrations relative to its size, but the shear size of the potential losses if the economy doesn't get out of its funk is the wild card.

The CRE problem will hurt the regional banks like Regions Financial, SunTrust, Zion, and BB&T much more because of the relative exposure. So in this regard Wells and larger banks can escape the CRE issue if the economy picks up and losses subside because these banks went through the "Bogus" "Stress Tests", they have already been told to raise additional capital, even though I think they need to significantly raise more funds.

With unemployment currently at 9.5% and rising, the fundamentals for commercial loans may not improve soon, especially because the economy often bottoms out before those loans do.

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