Friday, August 1, 2008

Wachovia will walk-over-you

I get about two emails a day seeking my views on Wachovia. I am going to disappoint people who want a really detailed examination.

But I will give my quick views before I get to the real point of this post:

Wachovia is a bank with a credibility problem and a funding problem. Whereas I think a smash-em-up insolvency is unlikely at WaMu because WaMu has enough core deposits the same is not true at Wachovia. Core deposits at Wachovia are 390 billion and falling slightly. Total deposits (including hot-money deposits) are 435 and rising. [The deposit trends at Wachovia are worse than at WaMu - though as you will see later the research for this post is giving me some concern at WaMu.]

Loans are 476 billion and rising. The reasons for the rising loan balance are not entirely apparent (and leaves me suspicious). But whatever the reason, rising loans represent rising need for funding.

There is a lot of wholesale funding (especially loans pledged with the FHLB and the Federal Reserve). Bluntly is a shortage of ready funding at Wachovia and Wachovia needs more.

And as the loan problems at Wachovia look a lot worse than average it’s unlikely the capital markets will be generous. They might lend to Wachovia – but they will demand collateral, high rates or both.

So what does a bank in that position do?

It pays up for deposits. Big time.

I got this email – which, so far, I have not confirmed:

Wachovia, in two markets I do business in as a financial planner, has begun offering special rate CD way higher than any other market participants. 5% for three years! Non jumbo btw regular deposits and they claim they can offer double insurance protection by using their bank of Delaware Sub.!

What I can confirm however is that Wachovia is trying very hard to get deposits. Here is the featured deposit advert if you go look on their website. It varies a little by zip code – but they appear to have this high-rate offer in most states.

They are offering an APY of 4.25% on a 12 month CD, minimum deposit 5 grand.

And here are the high rate CDs as listed on BankRate.com.

Wachovia – through its many branches – is offering a rate as high as all but a few diabolical brokered bank CDs. It is paying top dollar.

Now I got to observe something here. The only banks that have a higher rate than Wachovia are Amtrust Direct, Heritage Bank and Corus. Even GMAC bank has a lower rate.

But when I did this survey yesterday WaMu wasn't on the list. Now it is. Comment to come... but this weakens my case for WaMu preferred...

I guess 4.25 percent for deposits is not top dollar when your credit default swap is where it is at the moment. But if you have to pay that much over the odds for money then it rather eats into your margin.

If you are not convinced that Wachovia really is paying over the odds – then have a look at Wells Fargo CD rates (choosing California as jurisdiction). The advantage of not having a funding problem is large at the moment. [I have no opinion as to whether Wells is a good stock or not – but it does have a funding advantage!]


Moral

Banks that are highly dependent on hot-money CDs for their funding have a problem. If Wachovia is competing with you for those large branch CDs then Wachovia will walk-over-you.

Or, tempted by high rates, maybe your customers will just walk-over-to-them. Either way – if your funding is “non core” your margins will be under pressure.

A request

I used to look at bankrate.com to find out which banks were “keen” for funds. But the Wachovia rate is not advertised on bankrate.com. [I used to look for short candidates amongst the banks that were prepared to pay up – and I wasn’t alone – so maybe banks are not reporting to bankrate.com any more.]

If my precious readers scattered all over the world now notice banks that are advertising very high rates locally could they email me. I would really appreciate it. I am very interested in Norway - but I have only a few readers there. Please!

John

10 comments:

Quarrel said...

My local Westpac (probably around the corner from you), is offering 8.3% for a 12 month term deposit. How outrageous is that? :)

(On a less silly note, how long will they stay up in the face of articles like this one Australia Facing `Once-in-100-Year' Housing Slump?...)


--Q

John Hempton said...

That is the Gail Kelly influence.

I think that woman is bad news and have blogged about it.

You know what is really strange - which is that Westpac now outguns Mac Bank in the deposit wars.

Australian housing - particularly Sydney - is amongst the most expensive in the world. The way to measure price is median price versus median income.

Sure Estonia is double Sydney on that measure... but that hardly makes Sydney cheap.

And if you are a Sydney person drop me an email.

J

Paul said...

I work in a family office and deal with Wells Fargo's structured product team. They tell me that they have been experiencing a large increase in volume as investors turn to them for their high credit rating(still AAA with at least one major credit agency last time I checked), as Wells Fargo is the counterparty in these contracts. Wells sells a lot of "capital protected" products, which have an option + "zero coupon equivalent" structure according to their sales pitch. It was explained to me by a structured product specialist at a different institution that this "zero coupon equivalent" in actuality is a cheap source of financing for the bank, since they are not actually going out and buying zero coupon bonds.

This is another source of funding advantage, which will go some way to helping them dig out of their home equity loan issues which they have been hiding with creative accounting.

I live in California, where the failure of Indymac has been very visible. The failure prompted a lot of businesses who have deposit accounts over the FDIC limit to move to Wells Fargo.

Erik said...

Here is a website that gathers interest rates from all the banks in Norway. http://www.finansportalen.no/Forsiden

Unfortunately it's only in Norwegian. But here is a place where they liste all the banks in a chart. It's also in Norwegian but I think you will be able to understand most of it http://www.dinside.no/php/art.php?id=86550

/Erik

John Hempton said...

To the Norwegian reader: Wow - that is why I have a blog...

Can you email me? Thanks.

===

The comment on Wells Fargo I think is spot on. I do not think Wells is cheap - but tricks like getting implicit financing at the zero coupon bond rate - that is special... (No position on Wells).

J

Anonymous said...

For Denmark it is

www.mybanker.dk

Anonymous said...

KEY is offering 4.5% on jumbo's. They're not advertising it, but it's communicated to customers with substantial assets.
RJ

Anonymous said...

http://mrmortgage.ml-implode.com/2008/07/27/wamu-what-options-do-they-really-have/

Anonymous said...

I'm not sure if I buy the argument. Banks seem happy to pay up for deposits, while far higher than fed funds, and probably higher than interbank funding, these rates are far cheaper than term funding in the bond market (which isn't really open anyways)....

Looking at rates in NY, Wachovia isn't paying a spread significantly higher than the "too big to fail banks"

Wachovia 4.25% 12mth
JPM Chase 3.5% 12mth
Citi 3.5% 9mth
BoA 3.45% 12mth
Countrywide 4.10% 7mth

It would worry me if the big boys (JPM, C, BAC) were offering 2% and WB was 2+pts higher, but 75bps extra does not strike me as desperation in any way.

Anonymous said...

Here are two Swedish sites (in Swedish):

http://www.finansportalen.se/sparkontoguiden.htm

http://www.privataaffarer.se/basta_priset/sparkonto/
(with a simple calculator)

Of the bigger Swedish banks Swedbank currently offers the highest rates.

I don't want to spread rumors, but I've heard from several sources during the last few weeks that Swedbank has suggested costumers to put their money in long-term deposits. From what I've heard they start talking about long-term deposits during routine bank errands. I have to go to Swedbank on Monday and I will check this out myself.

Usually they try to convine people to invest in funds. To be fair, many people might be a little worried about putting money into funds right now, and long-term deposits might be easier to sell for Swedbank. Still, this is a bit disturbing.

/ttt

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