Bloomberg reported Monday that Wells Fargo (WFC) may need an additional $5OB to pay back the U.S. Treasury and to cover loan losses. WFC surprised the market last week, by pre – announcing a $3B profit in the 1st quarter, but provided limited details of that pre – announcement.
We should not be euphoric about this announcement, as there are some unknown details and negative headwinds that the company still faces.
With the current job losses continue to increase at a 700K per week clip, we can expect the credit losses for WFC will rise with the higher unemployment. This will reduce the company’s bottom line, and will impact their earnings going forward.
As reported by Bloomberg, WFC charge – off rate significantly increased to $3.3B in its current quarter compared to $2.8B from the last month.
Credit Suisse analyst Moshe Orenbuch stated,
“Given rising unemployment, continued home price declines and general macroeconomic headwinds, WFC’s consumer and commercial portfolios remain at risk for meaningfully higher credit losses over 2009 and 2010.”
I could not agree more.
I believe the strong movement in WFC is premature, and will settle back down in the mid to low teens.
Disclosure: The author does not have a position in WFC.
Monday, April 13, 2009
GS: Strong Earnings, Still Faces Negative Headwinds
The early earnings released today by Goldman Sachs (GS) came as a surprise to all, but what is more of a surprise is the results were better than expected.
The street was expecting $1.60 (First Call) per share for the quarter, but GS reported a quarterly result of $3.39 per share, a 5% increase as compared to the first quarter of 2008.
Strong Trading and Principal Investments helped the top line, but weak Asset Management and Investment banking hinder GS total revenue stream. GS liquidity continues to gain strength.
There are some important highlights that we should look at from their press release.
Their investment banking segment showed a 30% decline Y/Y, and what is alarming is decline of 20% Q/Q. This is primarily due to a “significant decline in industry – wide equity and equity – related offerings.” We should expect this to be the constant theme for the upcoming year, as the global market conditions are unfavorable to stable.
The trading and principal investments showed a healthy increase of 40% Y/Y. This is very impressive given the current market conditions. This is due to a strong “performance in interest rate products, commodities and credit products.”
There are also a few things that we need to bear in mind in their press release statement. GS advises that their “illiquid assets generally continued to decline in value.” This can cause some concern in the near future.
In addition, GS mentioned that “credit products included losses from corporate debt and private equity investments, and mortgages included a loss of approximately $800M (excluding hedges) on commercial mortgages loans and securities.” This is an improvement over the 1st quarter of 2008, when GS reported a $1B loss in credit products.
The Asset Management and Securities services declined 29% Y/Y, and for the past quarter it reported a 17% decline Q/Q. During the recent quarter, GS reported a decrease of $27B to $771B, due to $16B of market depreciation, primarily in equity assets, and $11B of net outflows. This is a major area that investors should keep their eye on for the next year.
As assets continue to deteriorate, we can see continue decline of GS Asset Management business segment to continue to hinder their revenue stream.
However, on the bottom line of the income statement, GS expenses increased by 10% Y/Y. Of that amount the compensation expenses increased by 18% Y/Y, while other operating expense offset the increase due to modest to healthy reductions in other businesses expenses.
As been reported for the past couple days, GS has announced that it will offer $5 Billion of its common stock for sale to the general public. The purpose of the sale is to pay back part of the $10 Billion of the TARP funds received from the U.S. Treasury.
In closing, Chairman and CEO Lloyd Blankfein mentioned that
“Given the difficult market conditions, we are pleased with this quarter's performance…Our results reflect the strength and diversity of our client franchise, the resilience of our business model and the dedication and focus of our people. We believe these attributes position the firm to continue to create value for our clients and actively fulfill our role in the capital markets.”
Although GS has reported strong earnings for the quarter, as like Wells Fargo (WFC), I believe we have to take a wait and see approach with GS. We do not know the whole details of their earnings and what is on their balance sheet.
Disclosure: The author does not hold any positions in GS
The street was expecting $1.60 (First Call) per share for the quarter, but GS reported a quarterly result of $3.39 per share, a 5% increase as compared to the first quarter of 2008.
Strong Trading and Principal Investments helped the top line, but weak Asset Management and Investment banking hinder GS total revenue stream. GS liquidity continues to gain strength.
There are some important highlights that we should look at from their press release.
Their investment banking segment showed a 30% decline Y/Y, and what is alarming is decline of 20% Q/Q. This is primarily due to a “significant decline in industry – wide equity and equity – related offerings.” We should expect this to be the constant theme for the upcoming year, as the global market conditions are unfavorable to stable.
The trading and principal investments showed a healthy increase of 40% Y/Y. This is very impressive given the current market conditions. This is due to a strong “performance in interest rate products, commodities and credit products.”
There are also a few things that we need to bear in mind in their press release statement. GS advises that their “illiquid assets generally continued to decline in value.” This can cause some concern in the near future.
In addition, GS mentioned that “credit products included losses from corporate debt and private equity investments, and mortgages included a loss of approximately $800M (excluding hedges) on commercial mortgages loans and securities.” This is an improvement over the 1st quarter of 2008, when GS reported a $1B loss in credit products.
The Asset Management and Securities services declined 29% Y/Y, and for the past quarter it reported a 17% decline Q/Q. During the recent quarter, GS reported a decrease of $27B to $771B, due to $16B of market depreciation, primarily in equity assets, and $11B of net outflows. This is a major area that investors should keep their eye on for the next year.
As assets continue to deteriorate, we can see continue decline of GS Asset Management business segment to continue to hinder their revenue stream.
However, on the bottom line of the income statement, GS expenses increased by 10% Y/Y. Of that amount the compensation expenses increased by 18% Y/Y, while other operating expense offset the increase due to modest to healthy reductions in other businesses expenses.
As been reported for the past couple days, GS has announced that it will offer $5 Billion of its common stock for sale to the general public. The purpose of the sale is to pay back part of the $10 Billion of the TARP funds received from the U.S. Treasury.
In closing, Chairman and CEO Lloyd Blankfein mentioned that
“Given the difficult market conditions, we are pleased with this quarter's performance…Our results reflect the strength and diversity of our client franchise, the resilience of our business model and the dedication and focus of our people. We believe these attributes position the firm to continue to create value for our clients and actively fulfill our role in the capital markets.”
Although GS has reported strong earnings for the quarter, as like Wells Fargo (WFC), I believe we have to take a wait and see approach with GS. We do not know the whole details of their earnings and what is on their balance sheet.
Disclosure: The author does not hold any positions in GS
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