Wells Fargo Reports Record Quarterly Profit on New Loans, Reserve Release

Wells Fargo & Co., the largest U.S. home lender, posted a record profit as lending expanded for the first time in at least a year.

Net income rose 21 percent to a $3.41 billion, or 61 cents a diluted share, from $2.82 billion, or 8 cents, in the same period a year earlier, the San Francisco-based bank said today in a statement. Results were helped by $850 million released from reserves as loan losses eased, and Wells Fargo told investors to expect more in the future.

“Wells Fargo saw solid growth in a variety of businesses, with record net income for the full year as well as the fourth quarter,” Chief Executive Officer John Stumpf said in the statement.

Stumpf, 57, used the 2008 purchase of Wachovia Corp. to push Wells Fargo to the top spot in U.S. mortgage lending as the financial crisis drove competitors out of the business. With profit growing, he’s under pressure from investors to restore the dividend, which was cut during the financial crisis, and fend off claims stemming from faulty mortgages and foreclosures.

Wholesale banking, the division that includes the investment bank and commercial lending and real-estate divisions, reported $1.6 billion of net income, up 11 percent from the third quarter. Total loans increased less than 1 percent to $757.3 billion from $753.7 billion in the third quarter.

Loan Growth

“Wells posted some loan growth and that’s certainly a positive,” said Shannon Stemm, an analyst with Edward Jones & Co. in St. Louis who rates the stock “buy.” “Loan demand will continue to recover as the economy recovers and Wells Fargo is positioned to capture that improvement”

Wells Fargo fell 68 cents, or 2.1 percent, to $31.81 at 4:15 p.m. in New York Stock Exchange composite trading. The stock gained 2.7 percent so far this year.

Profit for the full year advanced 1 percent to a record $12.4 billion. Total revenue declined 5 percent in the quarter to $21.5 billion, and income before taxes and provisions slid 17 percent to $8.15 billion.

Wells Fargo collected $2.8 billion in mortgage banking income, a drop of 19 percent from the same period of 2009. The bank reported $2.5 billion of mortgage banking income in the third quarter of 2010.

Refund Demands

The extra market share in mortgage lending came with added scrutiny as state officials probed the industry’s foreclosure practices and concern mounted among investors that banks will be forced to buy back billions of dollars in faulty home loans, draining their reserves.

The lender may “face some risks related to the industry’s foreclosure and servicing issues and additional regulatory scrutiny,” John McDonald, a Sanford C. Bernstein & Co. analyst, wrote in a Jan. 7 report. The bank’s “exposure to mortgage repurchases is mitigated by its better underwriting standards pre-crisis.”

McDonald estimates the lender may face another $2 billion in losses tied to so-called mortgage putbacks. Paul Miller, an analyst at FBR Capital Markets, estimates that repurchase losses at Wells Fargo may range from $3.1 billion to $5.3 billion, with $2.7 billion already taken as of his Nov. 29 report.

Demands for Wells Fargo to repurchase mortgages tied to both agency and non-agency securitizations declined, according to a presentation. The company had $506 million of losses in the quarter and set aside $464 million in provisions.

State Probes

Net interest margin, the difference between what the bank pays for funds and what it charges for loans, narrowed to 4.16 percent from 4.25 percent in the third quarter. Wells Fargo is the second-largest U.S. mortgage servicer after Bank of America Corp., according to industry newsletter Inside Mortgage Finance.

Among Wells Fargo’s biggest competitors, New York-based JPMorgan Chase & Co., the second-largest bank by assets, last week reported record quarterly profit of $4.83 billion, a 47 percent increase, which was boosted by a reduction in reserves. Citigroup Inc., also based in New York, posted a profit of $1.31 billion yesterday that missed analysts’ estimates.

Bank of America, the largest by assets in the U.S. and second-biggest home lender, plans to announce results on Jan. 21. It’s based in Charlotte, North Carolina.

Net loan charge-offs fell to $3.8 billion from $4.1 billion in the third quarter, led by housing and credit card losses.

Stock Performance

Wells Fargo, which briefly surpassed JPMorgan as the largest U.S. bank by market value during the quarter, has trailed the 24-company KBW Bank Index. Wells Fargo’s shares gained 15 percent in 2010, while the KBW index rose 22 percent.

In the last month, analysts for at least four firms, including Credit Suisse Group AG and Raymond James Financial Inc. raised their target price for the stock by an average of $3.43. The average target of 26 analysts is $36.62.

Wells Fargo, which slashed its dividend to 5 cents a share from 34 cents in May 2009, may be one of the first banks allowed by regulators to raise its payout, analysts said.

Stumpf told a Goldman Sachs Group Inc. investor conference in December he was “in violent agreement” that an increase to the payout was necessary. The bank will announce an increase of the payout to 10 cents in April, analysts surveyed by Bloomberg estimate. It may also repurchase shares or retire its trust- preferred securities in the second half of this year, McDonald wrote.

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

To contact the editor responsible for this story: David Scheer at dscheer@bloomberg.net

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