Wells Fargo & Co.'s first-quarter report on Wednesday had few big surprises, as results fell in line with the bank's forecast and easily beat Wall Street's estimates. But like most of its peers, the bank continues to post higher credit costs.
Still, investors found the report satisfactory and sent the stock up as much as 9 percent in early trading. Shares recently added 78 cents, or 4.1 percent, to $19.58.
Wells Fargo is among a number of the largest U.S. banks, including
Bank of America Corp., JPMorgan Chase & Co. and
Goldman Sachs Group Inc., to have reported better-than-expected profits. Morgan Stanley, however, posted a quarterly loss on Wednesday that exceeded the average analyst estimate, due in part to weakening commercial real estate investments.
Like the others,
Wells Fargo attributed much of its profit growth to a surge in mortgage revenue, thanks in no small part to historically low interest rates.
Wells Fargo originated $101 billion of mortgage loans during the quarter — the highest level since 2003. The bank had $83 billion in applications in the month of March alone. What's more,
Wells Fargo added 5,000 employees in its mortgage unit to handle the influx of activity — in sharp contrast with many of its peers that have been cutting thousands of jobs to save expenses.
Analysts have warned that the increase in mortgage-banking activity is likely not sustainable over a long period of time.
Chief Financial Officer Howard Atkins told the Associated Press that the bank had $100 billion of unclosed mortgage applications in the pipeline at the end of the first quarter — signaling that the momentum will continue at least into the second quarter.
Wells is also starting to reap the rewards of its Wachovia Corp. acquisition in the form of expanded brokerage and wealth-management businesses. Wells bought the Charlotte, N.C.-based bank last fall at the height of the credit crisis.
But while the bank is benefiting from increased market share and better mortgage-banking revenue, it has not been impervious to the challenges of the
recession. Loan losses inched up as consumers and businesses struggled to pay off their debts.
"As long as the U.S. economy remains weak, losses on the combined portfolio will increase," said Mike Loughlin, chief credit officer, in a statement.
The amount of loans in
Wells Fargo's legacy portfolio that were written off as unpaid totaled $2.89 billion, or 2.82 percent of average loans, up slightly from $2.80 billion, or 2.69 percent, in the fourth quarter. Nonperforming assets, or loans past due, totaled $10.34 billion up from $9.01 billion in the previous quarter.
Wachovia's loan portfolio, however, proved less problematic than in the fourth quarter, when Wells took a massive $37.2 billion write-down on the bank's riskiest loans. That had saddled
Wells Fargo with a loss of $2.83 billion for the quarter. Through purchase accounting adjustments,
Wells Fargo was able to remove from its balance sheet at year end the entire estimated amount of future losses on Wachovia's high-risk loans.
What remains is the portion of loans with less loss potential. During the first quarter, losses on these loans totaled $371 million.
Analysts had mixed reactions to the results.
"Certainly
Wells Fargo isn't immune to the challenging environment, and they are impacted by the weakening economy and higher credit losses," said Tom Kersting, a financial-services analyst at
Edward Jones. "But they have shown that their discipline has resulted in better loan quality."
Andrew Marquardt, an analyst at Fox-Pitt Kelton, was encouraged by
Wells Fargo's core earnings power.
"They are gaining market share in loans and deposits," he said.
However, Frederick Cannon, an analyst at Keefe, Bruyette & Woods, wasn't as positive.
"The quarterly results support our belief that
Wells Fargo needs significantly more capital to withstand the current economic climate," he wrote in a research note. Cannon has previously estimated the bank will need $50 billion of additional common equity.
Wells Fargo was among an initial group of banks to receive aid from the government late last year as part of a $700 billion financial bailout plan. Several of them, including
Goldman Sachs and JPMorgan, have expressed a desire to return the funds as soon as possible. But Wells was mum on the subject. When asked if the bank plans to return the aid like some of its peers, Atkins replied that Wells' main focus "is keeping credit flowing in the economy and earning profits."
Banks that have received federal bailout funds have become subject to greater government scrutiny and limits on executive pay.
Wells Fargo said Wednesday that it earned $2.38 billion, or 56 cents per share, in the January-March period. This compares with $2 billion, or 60 cents per share, a year earlier.
The decrease in the 2009 earnings-per-share figure from a year ago was due to an increase in average common shares outstanding.
Before paying preferred dividends, the company earned $3.05 billion. Revenue for the quarter totaled $21 billion.
Wells Fargo had dazzled investors earlier this month when it said it would report a record first-quarter profit of $3 billion, or 55 cents per share, much more than the 23 cents per share analysts had been expecting. That sent its shares soaring 31.7 percent.
Since the announcement, the average analyst estimate increased to 41 cents per share.
