Well Done Wells Fargo
Wells Fargo (WFC) released second quarter results on 16 July and the market reacted very favorably. They reported earnings of 53 cents a share, down from 67 cents in the year ago quarter, but 3 cents ahead of consensus estimates. They also raised the dividend from 31 to 34 cents a share per quarter. The stock price jumped over 30% from the previous days close. At Wednesday’s closing price, the yield on the new dividend is 5%.
The earnings release sheds some more light on the quarter; some good news and some not so great news.
The first piece of great news was in the opening safe harbor statement. Mr. Bob Strickland, Director of Investor Relations, stated “…we believe we can mitigate losses by working with customers who are experiencing financial stress and that based on the current interest rate environment most of our adjustable-rate mortgages at Wells Fargo Financial scheduled to reset during the remainder of 2008 will reset at or below their current rate.” Key takeaway here is that most folks who are currently on schedule with their adjustable-rate loan payments aren’t going to be reset into trouble.
Pre-tax, pre-provision income was up 34%. When things eventually get to the point that WFC doesn’t need to set aside massive loan-loss provisions, earnings growth should be solid.
WFC is having some success in workouts for borrowers in trouble. Seventy percent of customers 60 or more days overdue, but not in bankruptcy or foreclosure, contacted by WFC were able work out a solution. The remainder either declined help or couldn’t be contacted.
Net charge-offs as a percentage of average total loans declined to 1.55% from the previous quarters 1.6%.
Revenue, loans, core deposits and net interest margin were all up compared to the previous quarter.
Although net loan charge-offs declined since the previous quarter, loans 90 or more days past due but still accruing increased from $1.63 billion to $1.78 billion.
I was surprised by size of the dividend hike. I was expecting a one, maybe two, cent hike just to keep the now 21 year string running. The quarters earnings were just ok, but the 10% dividend hike really made a statement on management’s opinion of the business prospects going forward.
I believe WFC is in great position to grow the business through a combination of acquisitions and organic growth. Among the big banks, they’re in about the best position to sift through asset sales or make acquisitions. Citigroup and Wachovia are struggling; BAC already bought Countrywide and JPM has to digest Bear Stearns. IndyMac’s recent failure should offer WFC a great opportunity to grow the business. Customers will be looking for a safe bank in a region where WFC is strong and there should be some asset sales to cherry pick. News reports covering the long lines of depositors at IndyMac branches may also prompt some people to shift accounts from weaker institutions to stronger ones.
In short, Wells Fargo painted a picture with some hope of improving business conditions. There are still a lot of problems to be worked out and there will no doubt be hiccups along the way. So far, Wells has managed the housing and credit meltdown better than most. With the dividend hike, management made a clear statement of confidence in the future.
I also recommend reading Tim Melvin’s piece on Wells Fargo at InvestorPlaceBlogs and agree with his conclusion that there is no reason to chase the stock up if you want to buy. My guess is short covering had some part in Wednesday’s price action and buyers will get a better entry point sometime in the near future. But, maybe, just maybe, the lowest entry price is now behind us.
Disclosure: Long WFC.