Wells Fargo recovery gains strength

  • Article by: JENNIFER BJORHUS , Star Tribune
  • Updated: January 17, 2012 - 9:13 PM

The bank's quarterly profit rose 20 percent as it reduced the money it had set aside for bad loans, but revenue was down 4 percent.

Wells Fargo & Co. said Tuesday that its fourth-quarter profit jumped 20 percent despite continued economic pressures that have weighed down many other banks.

The record results got a lift from the release of $600 million that had been set aside to cover soured loans, but Wells Fargo also saw strength in mortgage banking, commercial loans and investment banking.

Wells Fargo, which is less dependent on investment banking than other megabanks, is the first relatively traditional large bank to report earnings, with Minneapolis-based U.S. Bancorp reporting on Wednesday.

Analysts at Oppeheimer & Co. Inc. said Wells Fargo's report "confirms the notion that 'plain vanilla' banking is recovering steadily."

The San Francisco-based bank, which employs about 20,000 people in Minnesota, reported profits of $4.1 billion, or 73 cents per share, up from $3.4 billion, or 61 cents per share last year. Tuesday's results beat Wall Street expectations by a penny a share and contrasted with disappointing reports in recent days from Citigroup and J.P. Morgan Chase.

For the year, Wells Fargo's profit rose 28 percent to $15.9 billion, or $2.82 per share.

"I think this is a very, very strong quarter, even stronger than the 73 cents might suggest," Raymond James analyst Anthony Polini said.

Revenue growth remained elusive. Although revenue climbed 5 percent from the previous quarter to $20.6 billion, it was still down 4 percent from a year earlier, reflecting the tough lending climate banks face with low interest rates, a sluggish recovery and weak loan demand.

Wells Fargo's net interest margin, which measures the difference between what a bank makes on loans and what it must pay out in interest, came in at 3.89 percent, down from 4.16 percent a year earlier but up half a percentage point from the previous quarter. That's higher than many analysts expected because Wells Fargo saw the margin drop in the third quarter.

Credit quality was stable from the third quarter, with net charge-offs for uncollectible loans falling to 1.4 percent of average loans from 2 percent a year earlier.

Wells Fargo's commercial loans grew about 7 percent year-over-year to $345.5 billion, the bank said, with growth spread across a range of commercial loans. Some of the increase was due to some loans being reclassified, and to Wells Fargo's $3.3 billion acquisition of commercial real estate loans from the failed Anglo Irish Bank Corp.

But the growth was still solid, said Joe Morford, a banking analyst at RBC Capital Markets, which does business with Wells Fargo. "Loan growth was one of the highlights this quarter," Morford said.

While still down from a year ago, the bank's mortgage banking business grew by $531 million from the third quarter to $2.4 billion on higher origination volumes as people took advantage of low interest rates to refinance. That helped Wells Fargo's community banking segment offset a big decline in debit card revenue caused by a new cap on debit card swipe fees.

Wells Fargo has seen a particularly strong surge in deposits, said Chris Mutascio, a managing director at Stifel Nicolaus & Co. Total deposits were up about 9 percent for the year, or $72 billion, with most of that coming in the second half of the year, Mutascio said.

Much of the growth was in non-interest, no-cost deposits such as checking accounts with no interest, Mutascio said, calling the deposit growth "enormous." He said he expects to see the bank put the money to work buying more loan pools and continuing to pay down trust-preferred securities to save interest, among other things.

"That is all just future earnings power," Mutascio said of the deposits.

One downside: Non-interest expenses grew more than some analysts expected in the fourth quarter given the bank's "Project Compass" efficiency campaign.

Non-interest expense of $12.5 billion rose $831 million from the third quarter, the bank said, partly because of higher personnel costs associated with stronger mortgage and capital markets revenue.

The bank said it still expects to trim noninterest expense to $11 billion by the end of the year, and the higher-than-expected costs in the fourth quarter weren't enough to dampen analysts' enthusiasm.

"As the large banks go through the next week I think we'll come back to Wells, and it may be the one that's the high-water mark for the quarter," Mutascio said.

Jennifer Bjorhus • 612-673-4683

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