Normally, when a major bank announces a multibillion-dollar loss, falling revenue and a doubling of bad loans, that's enough to send investors heading for the exits.
But in a sign of just how low expectations have sunk for financial stocks, shares of Wells Fargo & Co. soared 31 percent on the day Minnesota's largest bank by deposits posted its first quarterly loss since 2001 -- and badly missed analysts' profit expectations to boot.
Apparently investors had braced for worse. A deepening recession and bigger-than-expected loan losses at Bank of America, Citigroup and others had some analysts speculating that Wells Fargo would have to slash its dividend or raise new capital. There was mounting concern that Wells Fargo's bold acquisition last year of ailing Wachovia Corp. of Charlotte, N.C., is causing more problems than previously anticipated.
But while serious concerns remain about the health of Wells Fargo's loan portfolio, bank executives made it clear Wednesday that they are not in a rush to raise more capital -- a move that would dilute existing shareholders -- or to ask for more funds under the U.S. Treasury's Troubled Asset Relief Program (TARP) after receiving $25 billion last year. Wells Fargo maintained its 34 cents a share dividend, as many other banks have cut their dividends in recent months to conserve cash.
What's more, the San Francisco-based bank seems determined to avoid the mistake of its biggest rival, Bank of America, which rushed to do a deal with Merrill Lynch last fall and then was slow to recognize losses on Merrill's balance sheet -- raising the ire of its shareholders. Last week, Bank of America asked for a second injection of capital from the U.S. Treasury as a result of greater-than-expected losses.
Wells Fargo executives, by contrast, appear to be preparing for the worst by taking dramatic steps to shore up its balance sheet after buying Wachovia, which is saddled with many exotic mortgage loans that are going soar as the housing market deflates. On Wednesday, Wells Fargo said it took $37.2 billion in credit write-downs Dec. 31 related to Wachovia's loan portfolio. The bank also increased its allowance for loan losses -- money banks set aside to cover bad loans -- to $21.7 billion in the fourth quarter from $8 billion as of Sept. 30.
"They really allayed a lot of the fears in the market," said Joe Morford, a bank analyst at RBC Capital Markets. "They've positioned themselves fairly well, with the write-downs and the reserves they added, for 2009."
However, while many analysts praised Wells Fargo for taking some big lumps upfront on the Wachovia deal, they still questioned whether it was enough. Wells Fargo's losses on loans written off as uncollectible rose to 2.69 percent of average total assets as of Dec. 31, up from 1.28 percent a year earlier.
The worst deterioration is in the bank's portfolio of commercial loans. In the fourth quarter alone, write-offs on Wells Fargo's commercial and commercial real estate portfolio more than doubled to $842 million from $338 million.
Overall, the bank posted a net loss of $2.55 billion, or 79 cents a share, compared with earnings of $1.36 billion, or 41 cents a share, a year earlier. The results included $1.20 in charges related to increases in credit reserves, loan write-downs and merger costs. Revenue for the quarter was $9.82 billion, down 4 percent from a year ago.
"They've really taken on quite a bigger risk in terms of credit quality with the Wachovia deal," said Mark Morgan, a senior bank analyst at Thrivent Asset Management. "Whether this is a good deal or not depends on how those losses unfold over the next five years."
Yet Wells Fargo and other banks have a potential guardian angel in the form of the U.S. Treasury. Both the Obama administration and the Federal Deposit Insurance Corp. are considering the creation of a so-called "bad bank" to buy up the toxic assets now weighing down on the banking system. The bad-bank idea emerged last September and was initially the core of TARP, before the Treasury converted the plan into an entity for making direct capital injections into banks.
The idea of a bad bank is favored by many experts as a way to help clean up bank balance sheets and rekindle lending. However, it would drastically increase the cost of the $700 billion bailout.
For now, Wells Fargo executives insist they have no plans to request additional TARP capital -- a sign, according to some analysts, that perhaps the bank actually expects its loan losses to diminish in 2009.
Shares of Wells Fargo closed up $5 at $21.19 a share.
Chris Serres • 612-673-4308
