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The Stagecoach Hits a Speed Bump

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October 17, 2007 – Comments (1)

Wells Fargo (WFC) reported 3rd quarter earnings before the market open on Oct. 16.  Earnings were 68 cents/share, up 6% from the previous year, but 2 cents below expectations.  Given current market conditions and the mark-downs several of WFC’s competitors have announced recently, I didn’t think it was a bad result.  For what it’s worth, Fool contributor Emil Lee seems to agree it wasn’t a bad report in “All’s Well at Wells Fargo.”  The market, however, didn’t like the report and gave the stock a haircut.  From market close on the 15th to market close today, WFC is down 4.7% while the BKX bank index is down less than half that at 2.2%.

Earnings Report Highlights

WFC continues to have success cross selling products in both the wholesale and community banking groups.

CFO Howard Atkins comments on Wholesale Banking close out with, “Our capital market activities showed good results in the quarter and were largely not impacted by the credit crunch or market dislocation. We have not significantly participated in any of the recently publicized large leveraged buyouts; we did not create any structured investment vehicles to hold off-balance sheet assets and have no plans to do so; exposure to CDOs is minimal; we have no direct exposure to hedge funds; we have never made markets in sub prime mortgage securities and consequently did not need to write-down any of that kind of debt security; commercial mortgages originated and held for sale were about $1.5 billion on average and experienced negligible losses in the quarter; our modest high yield bond portfolio is well diversified, was hedged and incurred minimal net losses; and we wrote down commercial loans held for sale by $20 million in our securities investment business, recorded in other non-interest income.” 

Core deposits were up. 

The Wealth Management Group reported revenue up 20% and earnings up 24% compared with last year.  Brokerage revenue was up by 31% with net income up 51%.  The increase was largely attributed to the 100-commission free trade deal offered earlier this year. 

Mortgage banking.  The CFO’s comments called the quarter “relatively strong overall.”  Applications were down on a linked quarter basis, flat year-over-year.  Originations were down on linked quarter basis with most of the decline coming from correspondent loans.  Mortgage servicing revenue was up, offsetting the lower origination fees. 

The ugliest looking news was credit losses of $892 million, up from $720 million the previous quarter.  Non-performing assets are $3.18 billion or 0.88% of assets, up from $2.72 billion or 0.79% of assets the previous quarter.  Not good, but not nearly as bad as many had feared. 

Summary 

Although the mortgage business isn’t pretty right now, consider the condition the rest of the industry’s in.  WFC’s mortgage competitors are going out of business or struggling to survive.  When the home loan business recovers, WFC will be the 800-lb gorilla in the market.

All in all, pretty decent quarter except for the mortgage business and everyone was expecting that to be bad.  And, this quarter didn't get the full benefit of the Fed funds and discount rate cuts.

Wells Fargo continues to be one of the better-run banks, but the banking sector will probably be a choppy ride until credit losses and non-performing assets stop growing.  In my opinion, WFC reported one of the better quarters in the group and doesn’t deserve to have sold off over twice as much as the bank index since the report.  If you’ve followed my blogs, you know I believe this is an opportunity for long-term, income-oriented investors to accumulate WFC at a good price.  I still believe that’s the case, emphasis on accumulate – slowly – look for dips – there’s plenty of time.

Disclosure – I own WFC.

1 Comments – Post Your Own

#1) On October 18, 2007 at 1:51 AM, MakeItSeven (32.41) wrote:

There was an old article on Bloomberg regarding WFC's Level 3 profits.  I don't know it it still applies to the latest quarter.

Disclosure: I intended to buy puts on both WFC and WM but between my day job and taking the kids to school, I forgot.  I'm still kicking mysef for that.

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