Q4 2008 13F

[frog03]

Where do you get the idea that GE has no tangible equity?  Those revenues and earnings from the various lines of business, most of which they are #1 or #2 in, come from somewhere.  Just because their financial assets dwarf their operating assets, and a standard ratio isn't defined by their intangible assets, doesn't mean that the core earnings generating power from the various businesses isn't there.  They are as tangible as Berkshire's businesses.  Cheers!

Well, it is more than an idea...  They have about 110 Bn equity and 100 Bn intangibles/goodwill.  So this means about 10 Bn tangible equity.  Now if you compare this vs. the size of your balance sheet which is about 800 Bn, this is about 1% tangible equity/size of balance sheet.  It would not take much to get to negative tangible equity.  I don't care if they are number one or number two in their business.  AIG was often referred to as the number one insurance company not so long ago...

[prevalou]

moreover, GE is in a lot of cyclical businesses. In this case, tangible equity partly invested in cash is a cushion. Look at Intel, number one in their business but barely at break even, cash is a great plus for this company.
A good portion of the goodwill was added in recent years, so maybe as the stock market, its value has diminished.

[prevalou]

before buying a bank, I make a stress test: can the bank bear a 10% loss on its credit portfolio.
I assume the bank can pay the loss with its provisions and one year cash flow.
In 1992 (real estate crisis in California), Wells Fargo passed the test (5% provision/credit and 5% cash flow/credit). Today it is not the case.
 

[StubbleJumper]

prevalou,

It would be simpler to state that you just have a policy against buying banks.   

Seriously, outside of our Canadian banks, there are almost none in the world that would meet your criterion.

SJ

[prevalou]

you are perfectly right. But who knows? Maybe someday, I will find one!

[dowfin1]

In 1990 Buffett used a 3% loss stress test, rather than a 10% for WFC.  From the 1990 letter:

  Of course, ownership of a bank - or about any other business - is far from riskless. California banks face the specific risk of a major earthquake, which might wreak enough havoc on borrowers to in turn destroy the banks lending to them. A second risk is systemic - the possibility of a business contraction or financial panic so severe that it would endanger almost every highly-leveraged institution, no matter how intelligently run. Finally, the market's major fear of the moment is that West Coast real estate values will tumble because of overbuilding and deliver huge losses to banks that have financed the expansion. Because it is a leading real estate lender, Wells Fargo is thought to be particularly vulnerable.

      None of these eventualities can be ruled out. The probability of the first two occurring, however, is low and even a meaningful drop in real estate values is unlikely to cause major problems for well-managed institutions. Consider some mathematics: Wells Fargo currently earns well over $1 billion pre-tax annually after expensing more than $300 million for loan losses. If 10% of all $48 billion of the bank's loans - not just its real estate loans - were hit by problems in 1991, and these produced losses (including foregone interest) averaging 30% of principal, the company would roughly break even.

      A year like that - which we consider only a low-level possibility, not a likelihood - would not distress us. In fact, at Berkshire we would love to acquire businesses or invest in capital projects that produced no return for a year, but that could then be expected to earn 20% on growing equity. Nevertheless, fears of a California real estate disaster similar to that experienced in New England caused the price of Wells Fargo stock to fall almost 50% within a few months during 1990. Even though we had bought some shares at the prices prevailing before the fall, we welcomed the decline because it allowed us to pick up many more shares at the new, panic prices.

[benhacker]

Yeah, I second downfin's comments.  A 10% loss estimate for a lender levered 10:1 is a pretty tough hurdle.  I'll have to dig into Wells' old financials to see if that could have ever been tested. 

Prevalou, if you could share your calcs, I'd be interested to see them... doesn't immediately make any sense to me, but I may be thinking about it wrong.

These days, Wells can survive a 10% hit (not talking about any recoveries) with minimal capital additions given the massive provisions they have in place, plus the purchase buffer they took with Wachovia + 2 years of Pre Tax, Pre Provision income.

The likelihood of a company like Wells getting to a point where they actually have to write off 10% of their assets is pretty astounding to me... like Great Depression type stuff >15% unemployement.

Or maybe I've just drank my WFC cool aid too much.

Ben

[Mungerish]

I've been in banking for 25 years and Wells is a very well run place IMO.
They are going to have an outstanding Q1 and probably entire year from the mortgage banking/refi perspective. How many of the loans aquired from Wachovia will be refinanced into agency paper?
My guess is quite a few.....
In the sense of full disclosure I should say that I am largely tailcoating WEB here as opposed to doing a month long+ deep dive into WFC. I am very familiar with them on a retail banking level, and that is where my own $.02 comes from.
If you read the transcript of the last conf call, the growth in deposits, loans and market share was just incredible
Ish

[prevalou]

   WELLS FARGO   M&T BANK   US BANCORP
TOTAL ASSETS   1 287   62   266
TOTAL LOANS   864   49   185
TOTL PROVISIONS   21   .788   3.5
Prov%loans   2.4%   1.6%   1.9%
EQUITY   77   3.6   15
EQUITY% actifs   6%   5.8%   5.6%
Equity%loans   8.9%   7.3%   8.1%
CASH FLOW    25   1.1   7.1
Cash flows%loans   2.9%   2.2%   3.8%
(prov+eq+cash flow)/loans   13.2%   11.1%   13.8%
equity/loans 2010 after 10% loan losses   3.2%   1.1%   3.8%

I made a rough spreadshit for Wells, M&T and US bancorp
The stress test for me has to consider a hard depression possibility, even if it is remote.
By the way, canadian banks don't pass the test

[ericopoly]

Mungerish,
By the way, thanks for saving me money on NEW and FNM.  I took your advice and owned zero.

The conference call transcript is a bit long, so anyone who wants a quick look at Q4 highlights can find it here:

https://www.wellsfargo.com/pdf/press/4Q08_Earnings_Presentation.pdf