Wells On The Tape...Not Pretty.

Wells beat estimates by a wide margin on gains from mortgage related business. Wachovia side of the business also showed positive signs.

Looking closely 3.2B 2Q profit got $1B in help from an arcane asset known as "mortgage servicing rights." Wells services piles of mortgages for other lenders and investors, rather than just itself,
the value of those contracts changes with mortgage rates and loan volumes. In the last quarter, as mortgage rates rose, Wells said those rights rose $2.3B, before the bank's hedging strategies claimed $1.3B of that gain. So this bottom line number is from clean.....

....And the same old problems remain, mostly in toxic problem loans and commercial real estate.

The Wells CFO is stating that allowances for credit losses covers about 12 months expected losses for consumer portfolios, and losses in commercial and commercial real estate portfolios over 24 months. So they have taken enough reserves based on their modeling.

But...the Chief Credit Officer said the bank expects credit losses and nonperforming assets to increase, despite "some moderation" in the rate of growth in some consumer portfolios.

So what is it? On one hand you are properly reserved for losses, but on the other hand losses will get worse?

Bottom line the charge offs were $4.3B while the non-performing assets were up 45 percent. They say they are properly reserved for future losses, but looking at non performing assets, they are seriously under provishioning for losses.

The big worry here is even with the $25B in TARP money, Wells still needs to raise some $5-6B to make up for capital shortfalls. This is not even taking into account repatriation of problem loans unto their balance sheet from SPV/OBS.

Just the fact that the government has not allowed Wells to pay back TARP is a sign that they they need to come clean on reserves and capital.

Looking through the loss reserves going forward, the quality of the loans, the deterioration it has broader implications for the banking sector as a whole.

Anyway you look at it, Wells needs to raise cash and do it quickly.