Wells Fargo Fares Well
Wells Fargo lifted market spirits today with milder-than-expected losses in its recent quarter. Positive sentiments helped push the Dow Jones Industrial up 2.5%, and the bank saw its shares rise in the strong double-digits while many bad-news banks were being tracked by the Federal Deposit Insurance Corp. for problems surrounding the credit crisis.
Early Wednesday, Wells Fargo (nyse: WFC - news - people ) reported double-digit profit declines in the second quarter as more customers failed to pay back their loans, but it was not as bad as had been expected by Wall Street.
Investors, who had anticipated poor earnings on more United States mortgage losses and bank failures, sent Wells Fargo shares soaring 32.8%, or $6.72, to close at $27.23 in trading in New York. Still, the stock is down 23.2% from its year-ago price.
Still, this was the third consecutive quarter of profit declines at Wells Fargo, as the bank weathered one of the U.S.’s worst credit crises. “We’re still affected by the weak economy,” said Chief Executive John G. Stumpf, “but we believe we’re one of the best positioned in financial services to grow through this adversity.”
Wells Fargo has fared better than some peers in part because it had less exposure to the subprime mortgages, which have undermined the financial sector.
Ladenburg Thalman analyst Richard X. Bove said that he was impressed by Wells Fargo’s earnings despite coming in well below results in the past year. Bove added that Wells Fargo benefited from less competition as rival Washington Mutual is shrinking, Countrywide Financial (nyse: CFC - news - people ) and Golden West (nyse: GDW - news - people ) are gone and Bank of America (nyse: BAC - news - people ) is not competing as hard for mortgage business. He also likened Wells to “a ‘hot knife’ in the ‘butter’ known as the West Coast,” as community bankers across the region are suffering. “The gains are likely to continue,” he noted.
Wells Fargo tightened pricing and underwriting standards, and pulled back from third-party originations, or mortgage brokers, and the home equity lending market, said Walter O’Haire, senior analyst with Boston-based financial research and consulting firm Celent. This more retail-focused approach is serving the company well, O’Haire said, and it is growing its conventional government guaranteed mortgage business nicely.
“Mortgage applications came in at $100 billion, with some 44% for refinancing and 56% in purchase applications. All in all, the ’slow and steady’ approach is paying off. The company should be able to continue growing its origination business and will be positioned very favorably once the overall housing market eventually stabilizes.”
The bank more than quadrupled the amount it set aside for credit losses to $3.0 billion from $720.0 million a year earlier. That provision included total charge-offs, or uncollectible debts, of $1.5 billion, and an increase in reserves for future losses of $1.5 billion. Wells Fargo’s total allowance for credit losses now stands at $7.5 billion, up from $6.0 billion at the end of the first quarter.
The bank said its new policy of writing off home equity loans where payments were more than 180 days late, rather than 120, resulted in it deferring $265.0 million in charge-offs.
Wells Fargo nevertheless increased its quarterly dividend to 34 cents per share from 31 cents, bucking the trend among many rivals that are lowering their payouts.
The mortgage lending climate remained tough, but Wells Fargo managed to keep total retail mortgage originations at $31.0 billion, the same as last year, despite tightening its pricing and underwriting standards.
“We were able to lend more to current customers where we believed it was prudent and properly priced,” said CEO Stumpf. He added that the company gained more business and customers through acquisitions.
Billionaire Warren Buffett’s Berkshire Hathaway (nyse: BRK - news - people ) is Wells Fargo’s largest investor, owning 8.8% of its stock as of March 31, according to Thomson Financial.
O’Haire said that “Wells Fargo could have kicked off its earning release with the introductory question: ‘Did we mention that Warren Buffet bought more of our stock?’” He added that the company’s management continued to successfully navigate through an otherwise volatile environment and avoid the problems of many beleaguered banks.
“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,” said Chief Executive Stumpf. “We are open for business and getting lots of it.”
In the recent quarter, Wells Fargo earned $1.8 billion, or 53 cents per share, down 21.7% from profits of $2.3 billion, or 67 cents per share, in the year-earlier quarter. The bank reported record revenues of $11.5 billion, a 16.2% increase from $9.9 billion last year, on strength in the bank’s deposits, mortgage banking, credit card, and wealth management businesses. Analysts polled by Thomson Financial had expected the bank to earn just $1.6 billion, or 50 cents per share, on revenues of $10.7 billion.
Miriam Marcus, 07.16.08, 6:35 PM ET
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Co-op of the week - Week of July 7th
Co-op of the week:
Location: Chelsea
Type: Co-op
Price: $1,595,000
Description: This lovely, spacious home in the heart of Chelsea is currently configured with two bedrooms, plus a windowed library, and two full baths. Close to Whole Foods, Madison Square Park, and many subway stops. Priced to sell.
Contact: Jackie Thurik
Phone: 917-573-0105
Click Here To View This Apartment
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