Wells Still Rolling (WFC)
On Wed morning, Wells Fargo (WFC) reported 3rd Quarter 2008 results in a press release and recorded message. The bank reported earnings of $0.49 a share, ahead of analyst expectations but 23% lower than a year ago and 7.5% lower than the previous quarter. The results included a 13 cent per share write down for investments in FNM, FRE and LEH and 10 cents per share going toward increased loan loss reserves. If the impact from the non-recurring security losses is excluded, earnings were only 2 cents per share below the same quarter last year.
$2.5 billion was applied to credit loss provisions against $2 billion of loan write-offs. Total loan loss provisions increased by $500 million to $8 billion or 1.95% of total loans.
Tier 1 capital increased from the previous quarter to 8.58%. The $25 billion of preferred stock that will be issued to the US Treasury will increase the Tier 1 capital ratio by nearly 0.5%.
Loan charge-off rates were mixed news. Consumer loans drove the loan losses, but after correcting for the change in charge-off policy from 120 to 180 days from the 2nd quarter, charge-off rate growth has moderated. Home equity loans are the primary loss driver. Commercial loan losses were down slightly from the 2nd quarter.
In loans 90 days or more past due but still accruing, the opposite was true. Both consumer and commercial past due loans increased, but the percentage jump in commercial loans was larger than for consumer.
A piece of good news for WFC is a substantial increase in deposits. CFO Howard Atkins stated, “Core deposits reached a record $334 billion at quarter end, up 10 percent from a year ago. Inflows of checking and interest bearing deposits accelerated sharply as the quarter progressed, across all customer segments - consumer, wealth management, middle market, large corporate and correspondent banking customers all contributed to the strong deposit inflows and increases in net new deposit accounts.” The increase spiked later in the quarter, roughly coinciding with a flight to quality as bank failures made the headlines.
The merger with Wachovia is expected to close by the end of 2008. The acquisition is expected to be accretive to earnings in the first year excluding integration costs, write-downs, transaction charges and credit reserve build. The deal should be accretive to earnings by the third year without any adjustments. WFC is still planning on proceeding with the $20 billion capital raise announced in conjunction with the acquisition announcement.
The earnings report is a mix of good and bad. Continued deterioration in the loan portfolio is troubling. The ability to increase loss reserves faster than recording write-downs while still earning enough to easily cover the dividend is a positive. Troubles in the banking sector appear to be driving deposit growth and new customers for WFC, a definite positive. And, regardless of the political ramifications, WFC should be able to leverage the $25 billion of relatively cheap government capital into earnings going forward.
JP Morgan (JPM) also reported a small profit yesterday morning, beating analyst’s estimates. This morning, Citigroup (C) followed that by continuing to report losses. BAC preannounced lower earnings and a dividend cut earlier this month. For an investor looking for one of the big 5 4 banks that has consistently earned more than enough to cover the dividend payout through the credit crisis, WFC is the only one left.
The stock price has held up very well over the big sell off the past few weeks. With all the market volatility we’ve seen, I suspect a patient investor may be able to pick up shares under $30. WFC can also be effectively purchased at a discount by paying attention to the arb spread and buying WB for those willing to accept the risk of the deal falling apart.