Wells Fargo's Net Income Tops Estimates

Wells Fargo & Co. rose as much as 6.5 percent in New York trading after the lender posted second- quarter profit that beat most estimates and said credit quality is improving faster than expected.

Less money was earmarked to cover loan losses at Wells Fargo, the biggest U.S. mortgage lender, according to a statement today. The San Francisco-based bank posted a 3 percent decline in net income to $3.06 billion, with per-share earnings of 55 cents, or 66 cents adjusted for some one-time items. That exceeded the 49-cent average estimate from analysts.

“Credit quality has indeed turned the corner,” Chief Financial Officer Howard Atkins said in the statement. “This positive trend will continue over the coming year.” Mike Loughlin, the chief risk officer, said the improvement was “earlier and to a greater extent than we had previously expected.”

Chief Executive Officer John Stumpf, 56, must counter sluggish demand for business and consumer loans and the costs of the financial overhaul passed by Congress. Some parts of the new law may have unintended consequences, Stumpf said in the statement, adding during a conference call that Wells Fargo will feel the financial impact less than its peers. It’s too early to say how much the new rules will cost, Stumpf said.

Wells Fargo rose 3 percent, to $26.70 at 1:15 p.m. in New York Stock Exchange composite trading after earlier advancing to a high of $27.60.

Revenue and Reserves

Revenue of $21.4 billion matched the first quarter and most analysts’ estimates, and fell 5 percent from last year’s second quarter. Stumpf has said that if the bank were judged on a single metric, it should be revenue.

Revenue was helped by a $506 million gain that came from the release of reserves tied to commercial loans held in the credit-impaired portfolio. That was partially offset by litigation expenses.

Wells Fargo’s net interest margin, the difference between what the bank charges for loans and pays for deposits, grew to 4.38 percent from 4.27 percent in the first quarter. The margin was helped by the large percentage of checking and savings deposits held by the lender, Atkins said in an interview.

“As we continue to get growth in checking and savings, that’s a factor that helps the margin,” Atkins said. “It’s all about good deposits.”

‘Troubling Signs’

Provisions for credit losses declined to $4 billion from $5.3 billion in the first quarter, the bank said, with loan-loss reserves declining 2.2 percent. That’s less than its three largest peers, which may bolster perceptions about the sustainability of Wells Fargo’s profit. JPMorgan Chase & Co. CEO Jamie Dimon said any gain from reclaiming reserves doesn’t represent “normal ongoing earnings.”

The decline in reserves also means Wells Fargo has less set aside than its peers even as the lender’s non-performing loans increase, said Mike Williams, research director at Gradient Analytics, a Scottsdale, Arizona-based research firm. Assets no longer collecting interest climbed 2 percent from the first quarter to $32.9 billion. Reserves set aside to cover credit and loan losses fell to $25.1 billion.

“There are still some troubling signs,” Williams said in an interview. “Their non-accruing loan numbers continue to go up, while everyone else’s are coming down.”

Four Largest Banks

Wells Fargo plans more reductions in reserves if the economy doesn’t deteriorate significantly, the statement said.

Net charge-offs declined 16 percent to $4.5 billion from the first three months of the year, the statement said.

Wells Fargo is the last of the four largest banks to report second-quarter earnings. Bank of America Corp., based in Charlotte, North Carolina, and Citigroup Inc. posted lower net income. JPMorgan, whose profit rose, and Citigroup are based in New York.

Analysts and investors are looking at the largest U.S. banks for confirmation that credit losses are shrinking. Bank of America, the biggest U.S. lender, told investors last week that credit quality is improving, and June credit-card write-offs fell at five of the six largest card issuers.

New Rules

Wells Fargo’s largest stakeholder is Berkshire Hathaway Inc., the insurance and industrial company controlled by billionaire Warren Buffett.

President Barack Obama today signed the biggest rewrite of Wall Street rules since the Great Depression. Analysts said the regulations will raise costs and cut revenue at banks. Wells Fargo may lose as much as $2.6 billion in profit from the new rules, Barclays analyst Jason Goldberg estimated in June.

Almost $440 million in lost profit will come from the so- called Volcker rule, Goldberg estimated, which limits investments in hedge funds and private-equity to 3 percent of Tier 1 capital. Atkins said he’s “not anticipating any changes” in a portfolio that includes stakes in private-equity and venture capital firms.

To contact the reporter on this story: Dakin Campbell in San Francisco at dcampbell27@bloomberg.net

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