Wells Fargo Profit Rises as US Home Lender Limits Damage From Defaults
Oct. 21 (Bloomberg) -- Wells Fargo & Co., the nation’slargest home lender this year, posted record third-quarterprofit by limiting loan defaults and wringing savings out ofWachovia Corp.
Profit almost doubled to $3.24 billion, or 56 cents adiluted share, from $1.64 billion, or 49 cents, a year earlier,San Francisco-based Wells Fargo said today in a statement. Theaverage estimate of 24 analysts surveyed by Bloomberg was 39cents a share.
Mortgage rates are hovering near record lows and the bankpredicted credit losses will peak in 2010. Last year’s takeoverof Wachovia is adding to earnings and costs tied to theintegration are “significantly less” than earlier estimates,Chief Executive Officer John Stumpf said in the statement.
“Credit is still an issue for all banks, but Wells Fargohas more flexibility to manage,” Andrew Marquardt, an analystat Fox-Pitt Kelton Cochran Caronia Waller LLC in New York, saidbefore the results were released. “They are ahead of the curvein realizing credit losses and have strong unimpaired coreearnings power.”
After paying preferred dividends, which includes a stakeheld by the U.S. Treasury Department, net income available tocommon shareholders was $2.64 billion. Included in the resultswas a $1.5 billion increase in the value of mortgage servicingrights.
Loan Losses
Assets no longer collecting interest climbed 28 percent to$23.5 billion as of Sept. 30 from the second quarter, thecompany said. The cost of loans written off as uncollectiblejumped about 17 percent from the second quarter to $5.1 billion,the company said.
“While the level of nonperforming assets and losses isexpected to remain elevated for a period of time, we currentlyexpect total credit losses to peak in 2010,” Chief FinancialOfficer Howard Atkins said in the statement. The bank predictedconsumer losses will top out in the first half and graduallydecline for the rest of 2010.
The bank climbed 3.3 percent this year on the New YorkStock Exchange, making it the ninth-best performer in the KBWBank Index. The shares rose 39 cents, or 1.3 percent, to $30.46yesterday. The biggest investor is Warren Buffett’s BerkshireHathaway Inc., with a 6.5 percent stake. The stock traded at$30.03 as of 8:32 a.m. in New York today.
Wells Fargo is the last of the four biggest banks to reportearnings for the third quarter. JPMorgan Chase & Co., rankedsecond by assets, posted its highest profit since the subprimemortgage market collapsed in 2007. Citigroup Inc., the third-biggest, posted a $101 million profit after adding less to loan-loss reserves. Both are based in New York.
Mortgage Lending
Bank of America Corp., the largest by deposits and assets,posted a $1 billion loss after a rise in consumer loan defaults.The company is based in Charlotte, North Carolina. Wells Fargoranked third in deposits at midyear with $813.7 billion andfourth in assets with $1.28 trillion.
Profit at Wells Fargo was boosted by selling less complexmortgages after competitors offering so-called exotic loansfailed or scaled back, Kathleen Vaughan, the division head ofwholesale lending, said in an Oct. 14 interview.
The bank must contend with losses tied to Wachovia’s $89billion of option-ARM loans, which have some of the industry’shighest default rates. Stumpf previously said the risks havebeen reduced.
Option-ARMs let borrowers defer interest payments and addthem to the loan’s principal; some have low initial rates thatincrease in later years. The loans can backfire in a recessionif monthly payments and balances continue rising while the homeprice falls. That wipes out the owner’s equity and leaves nocushion for the bank in case of default.
Debt Offering
Improved credit markets helped Wells Fargo raise $2 billionin a debt offering in September, the company’s first sale ofbonds not backed by the Federal Deposit Insurance Corp. sincethe collapse of Lehman Brothers Holdings Inc.
Like Bank of America and Citigroup, Wells Fargo hasn’treturned government bailout funds. The company had planned torepay the U.S. government’s $25 billion “shortly” and in a“shareholder-friendly way,” Stumpf said during a Sept. 1Bloomberg Television interview.
Mortgage refinancing slowed in the most recent three monthsafter propelling profit to a record in the second quarter. Totaloriginations in the U.S. fell by about 9 percent to $500 billionin the third quarter, according to estimates from InsideMortgage Finance publisher Guy Cecala. The lender accounted for23.5 percent of all mortgages in the first half, according toInside Mortgage Finance.
For Related News and Information:Top finance stories: TOP FIN <GO>Crisis page: WWCC <GO>Government bailouts: RESQ <GO>News on the credit crisis: NI CRUNCH <GO>Writedowns and Credit Losses: WDCI <GO>
Last Updated: October 21, 2009 08:46 EDTSource: Bloomberg
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