Tuesday, October 18, 2011

Wells Fargo loses luster with profit miss

Wells Fargo & Co posted lower net interest income as the weak U.S. economy squeezed its lending margins, sending the bank's shares tumbling more than 8 percent.

The report from the fourth-biggest U.S. bank exacerbated investor concerns that low interest rates and weak demand for loans from cautious businesses and consumers will hurt bank profits for a lot longer than they had expected.

The bank's shares fell 8.4 percent to close at $24.42 Monday, their biggest one-day percentage plunge on an earnings report in at least a decade.

Shares of the three larger U.S. banks, Bank of America, JPMorgan Chase and Citigroup fell too, but all less than three percent. Citigroup posted higher earnings on Monday mainly because of an accounting adjustment.

Wells Fargo executives said lending margins were down in large part because businesses and individuals made bank deposits faster than the bank could invest those savings in higher-paying loans. Another drag came from customers paying off higher-rate loans the bank had made in the past.

"Right off the bat, net interest margin declined more than expected," said RBC Capital Markets analyst Joe Morford.

Wells Fargo said net interest income, a key measure of lending profit, fell 5 percent in the third quarter from a year earlier. Fee income from making home loans and providing other services fell 7 percent over the same period.

Pressure on lending margins has increased since Aug. 9, when the Federal Reserve said it would intervene in the financial markets to pull down long-term rates.

As deposits have increased, the bank has had to buy securities, whose interest yield has been declining, with the money. As a result, Wells Fargo's net margin, which is the difference between what it pays for money and how much it gets for investing it, tumbled to 3.84 percent from 4.25 percent a year earlier. The lending spread was also lower than the second-quarter's 4.01 percent.

Chief Executive John Stumpf called the interest rate environment "unusual." He said the bank is working to strengthen its relationships with customers in anticipation of a time when they will want to borrow more.

"The economic recovery has been more sluggish and uneven than anyone anticipated," Stumpf said.

RELEASING RESERVES

Because the bank set aside less money to cover loan losses during the quarter -- $1.81 billion down from $3.44 billion a year earlier -- Wells Fargo's net income for common shareholders rose to $3.84 billion, or 72 cents a share, from $3.15 billion, or 60 cents a share a year ago.

Profit at Wells Fargo, the biggest U.S. home loan servicer, was a penny short of the average analyst estimate, according to Thomson Reuters I/B/E/S.

Wells Fargo's report comes as the industry struggles to hold onto recent profits after having lost tens of billions of dollars in the financial crisis. Financial company earnings in the third quarter are expected to be up only a fraction of a percent from a year earlier, and still less than half as much as they were five years ago, according to Thomson Reuters Proprietary Research.

Wells Fargo's loan portfolio was up 1.1 percent to $760 billion, with commercial loans up 3 percent in the quarter.

The loan growth was partly from higher demand and partly a matter of taking business from competitors, Chief Financial Officer Tim Sloan said in an interview. He said the economy is growing, but "choppy."

Analysts said Wells Fargo's report showed that banks generally are still benefiting from fewer delinquencies, though the pace of improvement is slowing as bad loans are removed from their books.

Wells Fargo said its earnings were boosted by releasing reserves of $800 million for bad loans, down from $1 billion in each of the first two quarters of this year.

Such releases amount to dipping into money previously set aside to cover bad loans and have been a significant part of bank earnings over the past year as lenders decided they set aside too much.

Wells executives told analysts in a conference call after the report to expect more reserve releases as long as the economy does not turn down sharply.

EXPECTING MORE

Analysts and investors have tended to expect more recently from Wells Fargo than from its bigger competitors because its shares are less subject to the ups and downs of the financial markets. Bank of America, JPMorgan Chase, and Citigroup, in contrast, earn more of their income from underwriting stocks and bonds and providing corporate takeover advice.

The bank said it began "streamlining" staff functions and consolidating consumer lending businesses and several TECHNOLOGY [] groups during the quarter.

Noninterest expenses fell 5 percent from a year ago to $11.7 billion on lower personnel, merger and litigation costs. Under a program announced earlier, the bank wants to lower quarterly noninterest expenses to $11 billion by the end of 2012.

Stumpf, asked in a conference call with analysts about the Occupy Wall Street protests, said, "I understand some of the angst and anger. This downturn has been too long.

"Unemployment is too high, and people are hurting. We get that," Stumpf said. He said he is more interested in making more loans to promote local economies than he is in an advertising program to improve the reputation of the financial industry. ' Reuters

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