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