Friday, October 16, 2009

Wells Fargo & Company (NYSE: WFC): Third Quarter Earnings Preview 2009

Wells Fargo & Company (NYSE: WFC) is scheduled to report third-quarter results before the market open on Wednesday, October 21, 2009. Analysts, on average, currently expect the company to report earnings of 36 cents a share on revenue of $21.63 billion. In the year ago quarter, the company reported earnings of 49 cents per share on revenue of $10.38 billion.

Wells Fargo & Company, through its subsidiaries, provides retail, commercial, and corporate banking services principally in the United States. The company operates through three segments: Community Banking, Wholesale Banking, and Wells Fargo Financial.

Late in July, Wells Fargo reported that second quarter net income applicable to common shareholders rose to $2.58 billion or $0.57 per share from $1.75 billion or $0.53 per share in the same quarter a year ago. Net income was $3.17 billion for the quarter. Net interest income for the quarter was $11.76 billion from $6.28 billion in the year-earlier quarter. Total non-interest income was $10.74 billion, compared to $5.18 billion in the prior-year quarter. Revenue for the quarter nearly doubled to $22.51 billion from $11.46 billion in the comparable quarter a year ago. Analysts, on average expected the company to report earnings of 34 per share on revenue of $20.49 billion.

Segment-wise, revenue from Community Banking was $14.81 billion, Whole sales banking was $5.24 billions, Wealth, Brokerage and Retirement was $2.99 billion for the quarter. Legacy Wells Fargo revenue for the quarter was $13.6 billion, up 19% from last year, while Wachovia contributed 39% of consolidated revenue.

Second quarter net charge-offs surged to $4.39 billion or 2.11% of average loans. Legacy Wells Fargo net charge-offs were $3.4 billion and Wachovia net charge-offs totaled $984 million.

Early in September, the bank said that it plans to repay its $25 billion in funds from the Troubled Asset Relief Program or TARP, in the near future without diluting existing shareholders. "We will pay it back, but we're going to pay it back in a shareholder-friendly way," John Stumpf, president and chief executive officer of the company reportedly said in an interview, referring to the TARP funds. "We are now earning capital so quickly, organically; we don't want to dilute our existing shareholders."

In October 2008, the government invested more than $100 billion in the nation's nine largest banks through the TARP, with Wells Fargo getting $25 billion. Government stress tests concluded in May this year showed that Wells Fargo needed almost $14 billion in new equity capital -- among the most of any bank involved in the industry bailouts.

Investors are expected to focus on the bank's non-performing assets figure as an increase in same must also result in increase of its provision for loan losses. Holding more of its cash in reserves reduces the amount used for income generating activities such as lending. This in turn negatively impacts future earnings. The allowance for credit losses, including the reserve for unfunded commitments, totaled $23.53 billion at June 30, 2009, compared with $7.52 billion at March 31, 2009.Although it is beginning to see some moderation in the rate of growth of losses in a number of consumer portfolios, as evidenced by some stabilization in early stage delinquencies, the bank expects credit losses and nonperforming assets to increase in third quarter. Wells Fargo's nonperforming assets rose to $18.3 billion in second quarter from $12.6 billion in the first quarter. "Because of the continued weakness in the real estate market and large amount of loan modifications we've completed, nonperforming loans are staying on the books longer than in the past," said Chief Financial Officer Howard Atkins in a conference call with analysts.

In terms of stock performance, Wells Fargo shares are almost flat since the beginning of the year. On Friday, shares of the company tumbled $1.36 or 4.33% to $30.02.

Disclosure: Author doesn’t own any of the stocks discussed here.

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