Wells Fargo profit rises as bad loans ease - East Valley Tribune: Nation / World

Wells Fargo profit rises as bad loans ease

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Posted: Wednesday, July 21, 2010 12:40 pm

NEW YORK — Better payment rates for mortgages, auto loans and credit cards helped lift consumer-focused Wells Fargo & Co.'s second-quarter profit by 12 percent.

The San Francisco-based bank on Wednesday joined Citigroup Inc., JPMorgan Chase & Co. and Bank of America Corp. in reporting earnings that rose in the April-June period as loan losses fell from the prior period.

Wells Fargo, which depends more on consumer banking and doesn't have the huge investment banking arm of the other big banks, also reported growth in deposits and new accounts, and an uptick in new lending.

"It is early yet to call these sustainable trends, but it is real progress and it is in the right direction," Chairman and CEO John Stumpf said in a conference call to discuss the results.

Wells Fargo posted net income applicable to common shareholders of $2.88 billion, up from $2.58 billion last year. Before the payment of preferred dividends, net income fell 3 percent to $3.06 billion.

On a per-share basis, profit was 55 cents per share, compared with 57 cents per share last year. That reflects a 17 percent increase in the number of outstanding shares.

The results came in well ahead of the 48 cents per share forecast, on average, by analysts polled by Thomson Reuters.

Shares of Wells Fargo gained 38 cents, or 1.5 percent, to $26.29 in afternoon trading, after earlier changing hands as high as $27.60.

Some improvement in loans was anticipated but "the results came in much more positively than many expected," said Adam Barkstrom, managing director of equity research at Sterne, Agee. "Particularly in the consumer portfolios."

And management in both the earnings release and the conference call was "pretty aggressive" in saying the worst credit losses are in the past, Barkstrom said.

"If these sort of credit trends hold, it's absolutely an indicator that things are at the very least are stabilizing," he said.

He pointed in particular to certain a group of dicey mortgages in California that Wells Fargo took over when it acquired Wachovia at the height of the financial crisis. He said the lion's share of those mortgages represent lower-valued properties. These loans have been performing above expectations, he said, positive signs both for the bank and the broader economy, as that hints at the start of a housing price recovery.

Wells Fargo slashed its provision for credit losses — money set aside for loans expected to go into default — by 22 percent to $3.99 billion, from $5.09 billion in the 2009 quarter.

Losses were reduced in home equity, mortgages, consumer lines and loans, auto dealer services and credit cards. The bank cited a slowly improving economy and actions taken over the last few years to improve underwriting standards and shed bad loans for the gains.

Wells Fargo wrote off 2 percent more loans than in the 2009 second quarter, $4.49 billion versus $4.39 billion. But the figure showed a drop in charge-offs of 16 percent from 2010's first quarter figure of $5.33 billion.

Fred Cannon, an analyst with Keefe, Bruyette & Woods, said the results were consistent with JPMorgan, Citi and Bank of America. "It's a sign that consumers, after a couple of pretty tough years, are getting back on track," he said.

Nonperforming assets, or loans that are considered past due and in danger of default, were $27.8 billion. That's a 76 percent leap from the prior year's $15.8 billion, but up just 2 percent from the first quarter, the smallest quarter-over-quarter increase in a year.

Wells said it is also seeing improving trends on 30-day delinquencies — payments that are just a month late — in many loan lines, including business, credit cards, home equity, student loans and mortgages.

Cannon's concern is that while the results showed some increase in new lending, the overall amount of debt being carried is falling.

"There's no expansion of credit," he said. That will make it difficult for spending to increase. "It's good for the economy down the road, but it doesn't get you real encouraged about second-half GDP."

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