Wells Fargo (WFC) Impresses Me

I've been a fan of Wells Fargo (WFC) ever since I saw an interview by the CEO where, when asked about all the exotic mortgages happening, said he had not even heard of some of them. Sometimes good old fashioned banking works. Warren Buffet has also owned it since 2001 so they are doing something correct. Now, Wells Fargo is in a bad neighborhood (financials) centered in the center of the tsunami (So California prices drop 29% year over year in June) but as I've said in our earnings preview for the week

Wells Fargo (WFC) - good management, terrible state to be centered in, and simply the worst neighborhood in the stock market. It will be one of the survivors when we come out of this mess.

I believe Wells Fargo's results are the reason for this rally, not oil or anything else. Yes profits were down year over year, but the stocks are being priced as "going out of business" sales. It's all relative. Unfortunately, Wells is more of the exception to the rule, but with such an oversold condition in the group you don't want to stand in front of 10,000 hedge fund computers covering their shorts. When the day comes that financials should be owned for more than a trade, the names like JPMorgan (JPM) and Wells Fargo (WFC) should be at the top of anyone's list... i.e. the guys when given enough rope by lax regulators, decided NOT to use it to hang themselves.

In the end the Federal Reserve is sacrificing the middle and lower class (inflation? what inflation? even our biased government reports show it at highest in 26 years) to help prop up the banking system. The core business of lending out money at a higher rate than its borrowed at works magic at 2% Fed funds rate. Especially when the powers that be don't give a damn about the proletariat. So the core business of these banks, excluding the loans that will continue to degrade as the economy worsens - err, stabilizes - err, booms in 1st half 2009, should be very good. For those that survive.

• Wells Fargo gave anxious investors a pleasant surprise Wednesday, reporting a profit drop that was milder than anticipated and lifting its quarterly dividend by 10 percent.
• Wells Fargo's second-quarter profit fell 22 percent as more customers at the nation's fifth-largest bank failed to pay back their loans. But it raised its dividend to 34 cents from 31 cents -- at a time when many other financial institutions are slashing theirs to preserve capital.
• The San Francisco-based company's shares soared $4.63, or 22.5 percent, to $25.14 by midday, after tumbling alongside other financial stocks over the last several days on worries about more U.S. mortgage losses and bank failures.
• Wells Fargo has now logged three straight quarters of profit declines. But the bank has been weathering one of the nation's worst credit crises much better than most of its competitors, in part because it had less exposure to the subprime mortgages whose failure undermined the financial sector. That means it hasn't been forced to take the huge number of write-downs that other banks have needed.
• "This is the first fairly positive data point that we've had for the banking industry -- we haven't seen any really strong results in the first half," said Byron MacLeod of Gradient Analytics. "This is where you're going to begin to see some stratification between those that are conservatively positioned, and those that aren't."
• The bank took a provision for credit losses of $3 billion. That provision included total charge-offs of $1.5 billion, and an increase in reserves for future losses of $1.5 billion. Wells Fargo's total allowance for credit losses now stands at $7.52 billion, up from $6.01 billion at the end of the first quarter. ($3 Billion? Bah! That's child's play - Citigroup loses that much in a fortnight!)
• Revenue soared 16 percent to a record $11.5 billion, on strength in the bank's deposits, mortgage banking, credit card, and wealth management businesses.
• Wells Fargo still has about $8.4 billion in home equity loans, which executives expect to keep posting losses until home prices stabilize. Meanwhile, charge-offs for credit cards and small business loans increased, (that's the next disaster for the banks) :)
• Of the mortgages that the bank issued last quarter, "the vast bulk were very plain-vanilla, fixed- and adjustable-rate mortgages, originated through our retail system," Atkins said. "And it was almost exclusively conforming business, as opposed to big jumbo loans." (reduction of risk even from a company already who was extremely cautious - and this folks is why the housing market is not coming back anytime soon - much of the "demand" of the past half decade was from people who will never even sniff a mortgage in the new era)

No position other than a mortgage with WFC ;)