Shares of Citigroup are up another 3% on Monday, flowing Friday's better than 8% rise. My overriding question is why? Investors seem pleased that the banking and financial services giant lost less than Wll Street expected. The Street has not gotten anything right on the bank stocks all year so why being wrong about Citigroup is a cause for optimism escapes me. The fact of the matter is that the report was simply awful. Is the fact that a company that has lost over $40 billion in the last year ONLY lost an additional $2.5 billion really a bullish case for its stocks? Look at some of the "highlights" of Friday's earnings report:
Revenues, down 29%
Expenses up 9% year over year
$4.4 billion in Credit losses
Loan Loss provision increased $2.5 billion
Third straight losing quarter
Increased credit card losses
Increased auto loan losses
Total assets down $99 billion

At least one large shareholder was skeptical of the results. One of the largest unions in the united sates, the American federation of State, County and Municipal Employees urged the bank to just give up and break the company up into separate division. The union sent charman Win Bischoff a letter stating that the bank was too large and unwieldy to over see and should be split up.
Speaking of Bischoff, he told investors over the weekend that he thought housing prices in the US and Britain could continue to fall for the next two years. This is unfortunate as a continued housing decline is going to continue to wreak havoc on his bank's balance sheet until they stabilize. He also told the BBC in the interview that he thought the credit crunch would last 2009.

If Citigroup's chairman does not think it is going to get better, why does Wall Street?

That wasn't so bad at all. Wells Fargo reported earnings today and, unlike many other banks of late, it wasn't that bad. The bank reported total earnings of $1.8 billion ($.53 a share) down from $2.3 billion ($.67) a year ago. Revenues were up 16% year over year reaching a record $11.46 billion. They did take a #3 billion dollar credit provision in the quarter, with half of that provision being added to loan loss reserves. As anticipated most of the credit problems were in the home equity and retail loan portfolios. Given the backdrop of the economy, the Wells Fargo report was really strong across the board. Total loans were up 18% and earnings assets rose 205 in the quarter. Core deposits grew in the quarter rose 65 and the bank increased its capital ratio during the three months. Most surprisingly in light of all the dividend cuts in the banking industry, Wells Fargo announced that it would be increasing its dividend for the 21st straight year.

Wells Fargo is not exempt from the credit and real estate problems. They will have write offs and credit losses in their mortgage and home equity portfolio. There will be some problems with credit cards, auto loans and other personal loans as consumer struggle with a weak economy and inflationary pressures. However, Wells was much better prepared than it s competitors. They avoided the alphabet soup of toxic derivative products and applied reasonable lending standards. CEO John Stumpf remarked on this in the press release when he said "We're still affected by the weak economy, but we believe we're one of the best positioned in financial services to grow through this adversity and to build an even stronger company for our team members, customers, communities and shareholders." CFO Howard Atkins expressed it even better in my opinion when he said Wells Fargo continued to profitably build its franchise this quarter, at a time when many in our industry are primarily focused on fixing rather than growing their companies,"

The company is in the catbird seat. They will be able to cherry pick opportunities to expand all of its financial services businesses. Although it has been speculated they might be interested in acquiring troubled rival Wachovia, Management suggested that they were focused on their core markets in the Western United Sates. Indeed, it would seem to me to make little sense for Wells to buy all the problems at Wachovia when they avoided the same mistakes themselves. Even with tightened lending standards and tougher credit underwriting standards, Wells Fargo is going to be able to fill a credit vacuum as other lenders withdraw form the marketplace.

The stock is ahead of itself this morning and I would wait for a pullback but if you have to own a large cap bank stock, Wells Fargo is clearly the one to own. Once again, when buying bank stocks it is best to date the good looking smart sister instead of the super sexy vixen with the sassy convertible.

It seems like it will never end. The situation in the banking industry just keeps getting worse. No matter how often pundits and prognosticators declare the bottom, the news keeps getting worse and the stocks continue to decline. Bank Indexes fell as much as 10% on Monday amidst the troubles at Fannie and Freddie. We have even had the first run on the bank in the US in decades as depositors clamored to withdrawal their money from IndyMac bank. The FDIC seized Indymac this week, marking the largest bank failure since Continental Illinois in 1984.

This morning we have even more bad news. Citigroup CFO Gary Chittenden lay to rest any talk of a near term turnaround for Citi. He told investors today that it will be two to three years for the impact of asset sales to make a difference. It will be at least that long, he said, before earnings begin to improve in any significant manner. He added that the turnaround would be a marathon, not s sprint. Citigroup is expected to report a $3billion dollar loss for the second quarter adding to its impressive streak of losses in the last year. The bank has lost $46 billion since the crisis began last August and has raised a staggering $40 billion of new capital to keep the doors open. There are concerns about Citigroup's ability to continue raising the capital it needs since those who put money into the bank in the first go round have lost as much as 505 on their capital.

Wachovia is under fire as well. Meredith Whitney of Oppenheimer, the analyst who has been the most negative, and therefore the most correct, downgraded the shares again on Tuesday. She thinks the mortgage portfolio will continue to lose money and threaten Wachovia's ability to generate profits. She thinks that the scenario of declining assets and rising losses may threaten the banks ability to recover form the credit turmoil. Wachovia shares are down over 80% in the last 52 weeks and trade well below $10 after trading above $50 just last year.

Rating agency Standard and Poors got in the act as well. The agency lowered its outlook for regional banks on Monday. They believe that credit quality continues to decline and banks will have to increase loan loss provisions in 2009 and 2010 far more than originally believed. Loans to developers are one of the areas S&P highlighted as those loans are dependent on a real estate market recovery to remain performing. They fell many of the regional's will have to raise capital in the form of common and preferred stock offerings that will be dilutive to current shareholders. It is also highly likely that will be more dividend cuts amongst the group this year.

We are staring to see some signs of the baby going out with the bathwater right now. All bank stocks are falling. Many of the nation's banks are struggling on the current environment but will be just fine in the long run. I am now staring to see banks with healthy capital ratios that re profitable trade well below book value. My two local favorites Severn savings and Annapolis Bancorp have continued to decline and are cheap. I still think Sovereign bank is going to survive and the stock is finally below tangible book value. I am not quite ready to put on the puke trade (where you have to stop and vomit two or three times before just loading up on stocks) but it is getting closer. I would focus on the highest quality balance sheets with equity to asset ratios over 10 and capital ratios at least twice the minimum for being categorized as well capitalized. I also would not even consider paying over tangible book value. Check loan loss ratios carefully and avoid those with heavy exposure to development loans.

Earnings season is upon us and many banks, both large and regional are going to disappoint investors once again. The stock declines as a result of this continuing bad news may give long term investors a chance to buy quality small banks at a discount. I caution that this will take a while to yield profits and the stocks are probably going to go down before they go up. But five years from now, these prices may well seem to be the bargain and investment of a lifetime.

So far 2008 has not been a lot of fun for the management and shareholders of Wells Fargo (WFC).Shares in the bank trade at the lowest levels in 5 years and are less than a dollar off of 52 week lows. The bank has been hit by its large exposure to residential real estate, particularly the difficult California markets. Analysts have steadily downgraded the stock pointing out that continued consumer weakness is going to make it difficult for debts to be repaid until the economy picks up. Wells is seeing rising delinquencies across the board in its consumer lending portfolio. Although home equity delinquencies are the most troubling, consumers are increasingly late with their auto loan and credit card payments as well.

Even bank bull Richard Bove got into the act, kicking Wells while it is down. Bove cut both his earnings estimates and price targets for the bank. He also cited consumer weakness as the reason for the downgrade. Analysts at JP Morgan included the bank on its list of bank with loan loss ratios that were far too low and would have to be increased in the near future. Although this could cause reduced earnings for them, Wells Fargo is in the comfortable position of having total and risk based capital ratios far above the current industry averages.

It has been thought since the credit crisis began that Wells Fargo would an opportunistic buyer of other financial institutions. Its excess capital puts them in the comfortable position of being a buyer at fire sale prices. The bank has begun buying but is being extraordinarily careful, and in my opinion prudent in its purchases. So far they have announced just one bank purchase, FSB Bancorp of Fort Morgan Colorado. Wells Fargo is already the number one depository institution in Colorado and the move adds to their base of operations in the state. They also purchased Flatiron premium Finance company headquartered in Denver but active in several sates. Finally, they purchased Transcorp Associates, an inventory fianance and factoring firm. There will be a lot of smaller banks and finance companies available below asset value before the credit and real estate mess is over and Wells Fargo should be able to profitably expand as a result.

The stock is still not a screaming buy. The bank is expected to report more write downs and credit related problems in its second quarter earnings report. They are expected to announce earnings on July 16th and investors will be watching closely to see how management fared in the second reporting period of 2008. Should the stock continue to fall closer to or below $20 a share long term investors will almost have to buy the stock.

Insiders would seem to agree. CEO John Stumpf recently added to his position as did outgoing Chairmen Richard Kovacevich.