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 its 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.