Wells Fargo Profit Rises as Bank Limits Damage From Defaults
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By Dakin Campbell
Oct. 21 (Bloomberg) -- Wells Fargo & Co., the nation’s largest home lender this year, posted record third-quarter profit by limiting defaults and wringing savings out of Wachovia Corp.
Profit almost doubled to $3.24 billion, or 56 cents a diluted share, from $1.64 billion, or 49 cents, a year earlier, San Francisco-based Wells Fargo said today in a statement. The average estimate of 24 analysts surveyed by Bloomberg was 39 cents a share.
Mortgage rates are hovering near record lows, helping Chief Executive Officer John Stumpf generate revenue from home lending. Costs tied to the takeover of Wachovia are likely to be less than the estimated $7.9 billion, Stumpf said Sept. 16 at a conference in New York.
“Credit is still an issue for all banks, but Wells Fargo has more flexibility to manage,” Andrew Marquardt, an analyst at Fox-Pitt Kelton Cochran Caronia Waller LLC in New York, said before the results were released. “They are ahead of the curve in realizing credit losses and have strong unimpaired core earnings power.”
The bank climbed 3.3 percent this year on the New York Stock Exchange, making it the ninth-best performer in the KBW Bank Index. The shares rose 39 cents, or 1.3 percent, to $30.46 yesterday. The biggest investor is Warren Buffett’s Berkshire Hathaway Inc., with a 6.5 percent stake.
Wells Fargo is the last of the four biggest banks to report earnings for the third quarter. JPMorgan Chase & Co., ranked second by assets, posted its highest profit since the subprime mortgage 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, 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 Fargo ranked third in deposits at midyear with $813.7 billion and fourth in assets with $1.28 trillion.
Profit at Wells Fargo was boosted by selling less complex mortgages after competitors offering so-called exotic loans failed or scaled back, Kathleen Vaughan, the division head of wholesale lending, said in an Oct. 14 interview.
The bank must contend with losses tied to Wachovia’s $89 billion of option-ARM loans, which have some of the industry’s highest default rates. Stumpf previously said the risks have been reduced.
Option-ARMs let borrowers defer interest payments and add them to the loan’s principal; some have low initial rates that increase in later years. The loans can backfire in a recession if monthly payments and balances continue rising while the home price falls. That wipes out the owner’s equity and leaves no cushion for the bank in case of default.
Debt Offering
Improved credit markets helped Wells Fargo raise $2 billion in a debt offering in September, the first sale of bonds not backed by the Federal Deposit Insurance Corp. since the collapse of Lehman Brothers Holdings Inc.
Like Bank of America and Citigroup, Wells Fargo hasn’t returned government bailout funds. The company had planned to repay the U.S. government’s $25 billion “shortly” and in a “shareholder-friendly way,” Stumpf said during a Sept. 1 Bloomberg Television interview.
Mortgage refinancing slowed in the most recent three months after propelling profit to a record in the second quarter. Total originations in the U.S. fell by about 9 percent to $500 billion in the third quarter, according to estimates from Inside Mortgage Finance publisher Guy Cecala. The lender accounted for 23.5 percent of all mortgages in the first half, according to Inside Mortgage Finance.
To contact the reporter on this story: Dakin Campbell in San Francisco at dcampbell27@bloomberg.net
Last Updated: October 21, 2009 08:04 EDT
