Oppenheimer's Meredith Whitney put her death spell on Wells Fargo (NYSE:WFC) downgrading the stock to Underperform from Perform, as they believe the company is under-reserved by at least $4.5 billion and will need to take a reserve "true-up" in 2008 and potentially more in 2009. Wells has been a long-time favorite holding of investors due to its consistency and continuity of results; thus, the firm believes there is significant room for multiple contraction in the event of anything unexpected, and in this case an unexpected reserve build. Note, given their now dramatically below consensus estimates, they believe few if any are anticipating what they believe to be the inevitable consequence of Wells' current reserve position.
Oppenheimer is cutting their EPS estimate for FY2008 to $1.20 from $2.15 vs. consensus of $2.33. FY2009E goes to $2.00 from $2.15 vs. consensus of $2.65.
They make the following forward assumptions: credit will continue to deteriorate and WFC will need to build its reserve coverage back in line with historical standards. Accordingly, they believe WFC will be forced to make reserve "true-ups" in excess of $4.5 billion throughout 2008. Note, our peak 2008 loss estimate for home equity is 4%, 1.1% for first mortgages, 7.5% for credit cards, and 1% for commercial loans. These loss assumptions are in line with industry expectations, but if losses continue to accelerate past the 2Q, Opco's well below Street estimates will prove too optimistic.
Notablecalls: Meredith Whitney has been dead right on many of the major financials lately. I fully expect WFC to trade below $30 level today.