This is our last recorded call. Wells Fargo has always been committed to providing clear, complete, and transparent communication about the company’s results to all of its stakeholders. As we enter the second year of the merger with Wachovia, we will be expanding our quarterly communications to include a live quarterly earnings conference call — starting in January for our Q4 and full year 2009 results — and we will also host an investor day in 2010.
Well, thank God because really — what is the point of a pre-recorded earnings call other than to act as (yet another) platform for window-dressed management speak?
Wells Fargo has just reported its third quarter results – net income of $32bn and revenue of $22.5bn. That profit is driven, we are told in the results, by “record $10.8 billion pre-tax, pre-provision profit” — which is total revenue less noninterest expenses, and doesn’t really make sense as an explanation of profit (we suspect the Wachovia acquisition has more to do with it).
In any case, as FT Alphaville has noted before, what many people are looking for in these results is an insight into how Wells’ rather large commercial real estate portfolio is faring. And while management’s pre-recorded comments on the subject are basically a reiteration of previous ones — there’s a-whole-other story in the financial supplement. Here though, to start, are some of CFO Howard Atkins’ recorded comments on CRE:
. . . we are seeing signs of stability in our credit portfolio and based on our current economic outlook, we expect credit losses to peak in 2010 with consumer losses potentially peaking in first half of the year and gradually declining as the year progresses. We have substantially less exposure to credit cards than our peers with large, national credit card portfolios. Where we do have large exposure, in commercial and commercial real estate, we are comfortable with how the legacy Wells Fargo portfolios were underwritten and are performing and we’ve previously written down the Wachovia portfolios at close of that acquisition late last year.
. . . We are on track – if not ahead – in terms of reducing Wachovia’s credit risk. We have dealt with this in several ways. At merger closing we built significant reserves for credit losses including conforming credit loss emergence practices to the more conservative practices of Wachovia and Wells Fargo. Second, through purchase accounting we wrote down the higher risk segments of Wachovia’s loan portfolios including the portion of their commercial real estate portfolio with the highest probability of default. Unlike other banks that have yet to incur losses on the highest risk portions of their loans, we have already accounted for these losses. Overall we believe our life of loan loss estimate originally assumed still holds, with commercial a little higher and Pick-a-Pay lower. In third quarter we added $184 million to reserves for impaired commercial and commercial real estate loans . . .
. . . Our $135 billion commercial real estate portfolio, down $2.6 billion from year-end, is larger than our peers, but is well diversified by property type and geography. As expected, losses throughout our CRE portfolio have increased from historically low levels. However, we also believe that our relationship-focus and prudent credit discipline build inherently higher quality into the CRE loan book compared with the rest of the industry . . .
And here’s some stuff we’ve picked out from the presentation, showing non-performing loans and net charge-offs increasing on Q2:
Oh, and here’s that (updated) diversification:
In any case — Wells Fargo are not entirely oblivious to the commercial real estate problem. Things, they say, will get worse before they get better:
Commercial and Commercial Real Estate: Expect loan losses to peak later in 2010
The question, we suppose, is how much worse.
Related links:
The Pandora’s box of Wells Fargo and commercial real estate – FT Alphaville
All aboard the commercial real estate bailout train – FT Alphaville