I thought Bank of America (BAC) was strong enough to survive without cutting its dividend. It was better managed than Citigroup (C) and wasn't in near the dire straits that C was in when it was forced to cut its dividend. This all changed with the announced acquisition of Merrill Lynch. When a company such as Merrill is sold at a fire sale, there usually is a reason. BAC is now learning why Merrill was so favorably priced - they got what they paid for. Is this same situation playing out with Wells Fargo's (WFC) acquisition of Wachovia?
Once considered to be the best run bank in America by many analysts, WFC is starting to struggle. Did the WFC executives turn a blind eye to the underlying financial data and only focus on the prize they had been eying for some time? From an outsider looking in, this appears to be the case. After a much larger loss in the fourth quarter than expected, most analysts that follow the bank believe a dividend cut is inevitable and, like BAC, a second trip to the TARP trough could be in the works. Are the shareholders possibly looking at a $0.01 dividend in the future?
Analysts from Friedman, Billings, Ramsey & Co. in a January 29 note pointed out that WFC only remained “well capitalized” by regulators’ lights because of the government’s $25 billion TARP injection. WFC’s 7.88% capital cushion does not compare well with other troubled banks such as Citigroup (11.8%), J.P. Morgan (JPM) (10.8%) and Bank of America (10.7%).
Other warning signs include a sharp increase in the amount of assets held for sale $178 billion from $106 billion in the prior quarter. Goodwill climbed to $23 billion from $14 billion. In this environment, goodwill is a difficult asset to justify to the auditors and ultimately to the Securities and Exchange Commission (SEC). Could future impairments be in the works, as Wachovia did in it final days?
There is reason to be concerned. Though the actors are different, I have seen this play before and the outcome is tragic.
Full Disclosure: No position in the aforementioned stocks.
Related Articles:
Is Wells Fargo Following Bank of America's Lead?
Posted by D4L | Thursday, February 12, 2009 | commentary | 3 comments »________________________________________________________________
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Quite the damning account of my favorite US bank WFC. As you may be aware the purchase of WB was paid for in the tax deduction that they will get and then some.
They recently wrote down an enormous amount of Wachovia's assets on the last filing to get them off the books before they take ownership.
Unlike BAC, WFC has John Stumpf and Dick Kovacevich. You either believe in the best management in the business or you don't.
If this turns into a real depression every dividend will get chopped, not just banks.
Similar situation here in the UK with Lloyds, which is a several hundred year old bank that has NEVER cut its dividend. It took over HBOS (the UK's largest mortgage supplier) and now everything has gone to pieces, the dividend has gone and the shares were down 40% yesterday. Horrible for holders (I sold up bank in October - luckily I admit, as I never thought things would get *this* bad).
Anon: At best a tax deduction will only provide around 40% on the dollar. I don't remember the deals structure, but if it was a stock purchase the tax basis of the assets carries over further eroding its deductibility.
Monevator: Unfortunately, the situation seems to be playing out all over the world. It goes to show that Execs. can sometimes jump the gun before everything plays out.
Best Wishes,
D4L