Thursday, June 9, 2011

Wells Fargo’s Poor Performance Triggers Stop

As of Wednesday’s close, UASBIG’s position in Wells Fargo (WFC) is down a total of 16%. There are six negative factors that suggest WFC will continue to underperform.

1.) On Wednesday, the senate voted 54-45 to maintain the scheduled caps on interchange fees. Bloomberg estimates that these new rules, which take effect on July 21st, could cut revenue by as much as $12 billion a year.

2.) Monday, Bernanke, in an exchange with Jamie Dimon, reiterated his support for additional capital restrictions on “systemically important financial institutions” like WFC. This constraint and other Basel III provisions will reduce returns on equity by as much as 3% when they are implemented.

3.) Recently a group of large banks, including WFC, have banded together to negotiate a one-time settlement that would satisfy all state and federal investigations into illegal mortgage origination and processing. The banks have offered to split a payment of 5 billion, but the government may be seeking up to 30 billion.

4.) The tepid housing market is making it difficult for WFC to fix their mortgage problems, and to create new loans.

5.) Net interest margins are being pressured by the low interest rate environment, exemplified by the 10-year treasury that is now yielding less than 3%.

6.) Any positive effects from QE2 will end in June.

At this point, there are significant headwinds affecting the valuation of WFC and all other large domestic banks. UASBIG will now seek more creative ways to invest in the financial sector.


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