By Ari Levy
April 22 (Bloomberg) -- Wells Fargo & Co., the second- biggest U.S. bank by market value, said first-quarter profit rose 53 percent as borrowers rushed to refinance mortgages and the lender put aside enough money to cover at least a year of loan losses.
Net income increased to a record $3.05 billion, or 56 cents per diluted share, from $2 billion, or 60 cents, a year earlier, San Francisco-based Wells Fargo said today in a statement. The better-than-estimated results, disclosed on April 9, were helped by mortgage rates of less than 5 percent that spurred home refinancings. Deposits climbed 1.4 percent to $756.2 billion after the takeover of Wachovia Corp.
“They should benefit strongly from mortgage gains,” said William Schwartz, a credit analyst at DBRS Inc. in New York. “As other players have weakened and moved out, Wells has gained share.”
Wells Fargo took advantage of the drop in interest rates to issue more than $100 billion of mortgages in the quarter. Revenue almost doubled to $21 billion, including Wachovia’s contribution, and helped the company overcome $3.3 billion of charges from unpaid loans. The allowance for credit losses totaled $23 billion, about twice the level of loans that have stopped collecting interest, Chief Financial Officer Howard Atkins said today in a separate statement.
“The allowance covers 12 months of estimated losses for all consumer portfolios and at least 24 months of estimated losses for all commercial and commercial real estate portfolios,” Atkins said.
Stock Reaction
Wells Fargo, whose biggest shareholder is Warren Buffett’s Berkshire Hathaway Inc., advanced 73 cents, or 3.9 percent, to $19.54 at 1:25 p.m. in New York Stock Exchange composite trading. The bank slumped 36 percent this year through yesterday, compared with the 23 percent drop in the 24-member KBW Bank Index.
The bank used deposits from the acquisition of Charlotte, North Carolina-based Wachovia, completed in December, to write more home loans than any other U.S. lender. Wells Fargo said in its report two weeks ago that the Wachovia deal is “exceeding expectations.”
Wells Fargo built its lead in originations over Bank of America Corp. and hired about 5,000 people nationwide in the quarter to handle the increased workload, Atkins said in an interview. About 20 percent to 25 percent of the mortgages were for new homes and the rest were refinancings, he said.
Market Share
“Actions taken by the Fed, primarily to lower rates, helped stimulate demand on the part of consumers,” Atkins said, adding the bank’s market share is increasing. “We may very well be one of the few banks in the country that’s adding to employment in the United States.”
Wells Fargo is the last of the four biggest U.S. banks to formally post first-quarter results. JPMorgan Chase & Co. and Citigroup Inc., both based in New York, reported profit last week that topped analysts’ estimates on gains in trading revenue. After Bank of America said April 20 that net income more than tripled, shares of the Charlotte, North Carolina-based company tumbled on concern that costs for uncollectible loans may increase.
Capital Levels
KBW Inc. analyst Frederick Cannon in San Francisco said in an April 13 report that credit losses may force Wells Fargo to raise $50 billion, including $25 billion that it owes to the U.S. Treasury for bailout funds.
“Our focus is on earnings,” Atkins said in the interview about repaying the government. “If we can keep on earning money, capital will take care of itself.”
The bank’s tangible common equity ratio, a measure of a lender’s ability to withstand further losses, rose to 3.3 percent in the quarter from 2.9 percent at the end of 2008. Nonperforming loans were 1.3 percent of total loans at the end of the quarter, compared with 2.5 percent at Bank of America and 1.6 percent at JPMorgan.
Part of the increase in capital levels resulted from a new accounting rule allowing banks to determine the fair value of assets that they were previously forced to mark down as markets deteriorated. Wells Fargo said the net unrealized loss on securities available for sales dropped by 53 percent to $4.7 billion from the previous period.
“Wells was a beneficiary as they no longer marked to market some of their securities to distressed prices,” said Jason Goldberg, a senior analyst at Barclays Capital in New York, who rates the shares “overweight.”
Fair-Value
Wells Fargo Chairman Richard Kovacevich said in speech last month that fair-value accounting rules don’t make sense when there’s no market to accurately price securities. Accounting “should always be about expected cash flows,” he said.
Profit at Wells Fargo included a restructuring expense of $206 million, or 3 cents a share, and a credit reserve build of $1.3 billion, or 19 cents a share, Wells Fargo said. The company paid preferred dividends of $661 million, including $372 million to the Treasury’s Troubled Asset Relief Program.
The decline in Wells Fargo’s stock reflects investor concerns that losses in Wachovia’s $482 billion loan book, which includes $118 billion of option adjustable-rate mortgages, will hurt Wells Fargo’s balance sheet and reduce its capital. In accordance with accounting rules, Wells Fargo took initial writedowns on $37.2 billion of Wachovia’s troubled loans.
Balance Sheet
“They’re starting 2009 with a big part of their balance sheet already marked to realizable levels,” said Jennifer Thompson, an analyst at Portales Partners LLC in New York, who recommends holding the shares. “A concern would be if credit quality were even worse than they expected.”
Unemployment in the U.S. jumped to 8.5 percent in March, the highest in 25 years. In Wells Fargo’s home state of California, the jobless rate surged to 11.2 percent from 6.4 percent a year earlier.
Regulators are using a “stress test” to determine whether Wells Fargo and 18 other banks have enough capital to handle increasing unemployment and a deepening recession. The Federal Reserve plans to release results on May 4. Atkins declined to comment today on the status of the review or the bank’s dividend.
To preserve $5 billion, Wells Fargo slashed its quarterly payout last month by 85 percent to 5 cents a share, joining Bank of America, Citigroup, JPMorgan and U.S. Bancorp in reducing the dividends.
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