By Linda Shen and David Mildenberg
April 9 (Bloomberg) -- Wells Fargo & Co., the second- biggest U.S. home lender, reported a record first-quarter profit that beat the most optimistic Wall Street estimates, sparking a rally in bank shares on speculation that the industry’s slump has ended.
Net income rose 50 percent to about $3 billion from $2 billion a year earlier, the San Francisco-based lender said today in a preliminary earnings report. Profit of about 55 cents a share was more than double the average estimate of analysts surveyed by Bloomberg. The acquisition of Wachovia Corp., whose overdue home loans helped cut Wells Fargo’s stock price in half this year, is exceeding expectations, the statement said.
The results add to evidence of a banking rebound after Citigroup Inc., JPMorgan Chase & Co. and Bank of America Corp. reported gains for January and February. Lenders benefited from a surge in home loans as interest rates fell below 5 percent, and President Barack Obama said today U.S. refinancings rose 88 percent in March. Wells Fargo closed $100 billion of mortgages in the quarter, with an equal amount waiting to be completed.
“They’re getting tons of applications and they can allocate their capital really effectively,” said Chris Armbruster, an analyst at Al Frank Asset Management in Laguna Beach, California, which oversees about $350 million and owns Wells Fargo shares. Low interest rates are providing “the temporary relief that they need to generate some capital to absorb some of these mortgage losses,” he said.
Wells Fargo rose $3.76, or 25 percent, to $18.65 at 1:25 p.m. in New York Stock Exchange composite trading after advancing as much as 34 percent. Bank of America, the largest U.S. lender, gained as much as 31 percent, while JPMorgan increased as much as 15 percent and Citigroup 12 percent. Wells Fargo’s biggest shareholder is Warren Buffett’s Berkshire Hathaway Inc.
Financial institutions have recorded more than $1.29 trillion in losses and writedowns since mid-2007, with more than 100 mortgage-industry companies folding in the worst housing market since the 1930s. Wachovia’s $101.9 billion in losses and writedowns was the most for any U.S. lender, according to Bloomberg data.
The acquisition of Wachovia, whose adjustable-rate home loans were considered among the riskiest in the industry, “has proven to be everything we thought it would be,” the bank said in its preliminary report. Formal results for the quarter will be released April 22.
“Margins are better because of the competitive situation” after many of the “irrational players” were eliminated, Chief Financial Officer Howard Atkins said in a telephone interview. The bank’s net interest margin, the spread between what it pays depositors and receives on loans, was about 4.1 percent in the first quarter, compared with about 3.10 percent in the fourth quarter and 4.7 percent in the same period a year earlier.
Wachovia paid extraordinarily high rates to attract deposits last year, Atkins said. Many of those accounts now are running off, which should benefit Wells Fargo’s profitability later this year, he said.
Profit per share fell from 60 cents a year earlier after the bank sold more than $12 billion of common stock in November to help fund the purchase of Wachovia.
Total revenue was $20 billion, and profit before taxes and provisions was about $9.2 billion. Combined net charge-offs for uncollectible loans dropped to $3.3 billion, compared with $2.8 billion for Wells Fargo and $3.3 billion at Wachovia in the fourth quarter. Most of Wachovia’s charge-offs on real-estate loans are completed, Wells Fargo said.
The ratio of tangible common equity to tangible assets, a measure of a bank’s ability to absorb sudden losses, was above 3.1 percent as of March 31, advancing from 2.86 percent at the end of 2008. Atkins declined to comment on the Treasury Department’s “stress test” of Wells Fargo, which is to be completed this month, along with similar surveys of 18 other large U.S. banks.
Wells Fargo posted its first loss since 2001 in the fourth quarter. The bank slashed its dividend earlier this year by 85 percent to save $5 billion a year in capital and said results for the first two months of the year were “strong.”
Bank of America, Citigroup, and JPMorgan had offered similarly upbeat assessments about the beginning of the first quarter, raising expectations for a rebound in the banking industry.
‘Act of God’
“Barring an act of God, they had better report some number that is in the black or potentially risk being involved in some of the most intense securities litigation on record,” Oppenheimer & Co. analyst Chris Kotowski said in a report yesterday.
Christopher Whalen, a managing director at Torrance, California-based Institutional Risk Analytics, said in a Bloomberg Television interview today that the Financial Accounting Standards Board decision to relax accounting rules may have helped banks including Wells Fargo report a profit.
“Most analysts are expecting loss rates to be much, much higher than we have seen in the last 20 to 30 years, even longer,” he said. “Given that, provisions of the large banks are not high enough.”
Wells Fargo increased its provision for loan losses by $4.6 billion bringing the total allowance to $23 billion. While Atkins said the reserve is at an adequate level compared with other large U.S. banks, FBR Capital Markets analyst Paul Miller said in a report today that the added provision was below his estimate of $6.25 billion.
“We remain cautious based on what we don’t know,” wrote Miller, who is based in Arlington, Virginia, and rates Wells Fargo shares “underperform.” Important numbers not in the preliminary report were the percentage of nonperforming loans and trends in Wachovia’s option-adjustable rate mortgage portfolio, he said.
Wells Fargo benefited from strong trading results at Wachovia’s capital markets business, which the bank continues to shrink, Atkins said. The improvement won’t reverse those plans, he said.
About 75 percent of Wells Fargo’s mortgage applications are for refinancings, Atkins said. Obama said interest rates are the lowest since 1971, which for homeowners is “money in their pocket.”
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