January 19, 2010, 06:31 AM EST
By Dakin Campbell
Jan. 19 (Bloomberg) — Wells Fargo & Co., one of the two biggest U.S. home lenders in 2009, may report its fourth straight quarter of improved results as the economy expanded and pressure to build reserves abated.
The bank probably swung to a fourth-quarter profit of $1.62 billion, or 9 cents a share, from a loss of $2.55 billion, or 79 cents, a year earlier, according to the average estimate of analysts surveyed by Bloomberg. Earnings per share may have been curtailed by the San Francisco-based bank’s $12.25 billion sale of stock to repay the Troubled Asset Relief Program. Wells Fargo’s results are due tomorrow.
Banks benefited from a resumption of U.S. economic growth in the fourth quarter, which Wells Fargo estimated at 5.3 percent annualized. Chief Executive Officer John Stumpf has said his firm will save $5 billion on expenses after absorbing Wachovia Corp., acquired in 2008, and losses tied to adjustable- rate mortgages may be less than budgeted.
“I would expect that they would have generated another healthy set of results if it weren’t for that TARP repayment,” said Richard Staite, a London-based analyst at Atlantic Equities LLP, who has an “overweight” rating on the shares. “As they integrate Wachovia, we will see stronger revenues come through that business.”
The bank dropped 91 cents, or 3.1 percent, to $28.08 last week in New York Stock Exchange composite trading. The lender, whose biggest investor is Warren Buffett’s Berkshire Hathaway Inc., declined 2.5 percent last year.
TARP Repayment
Wells Fargo is the last of the four biggest U.S. banks to report results. JPMorgan Chase & Co., the second-largest U.S. bank by assets, said fourth-quarter profit more than quadrupled to $3.28 billion, or 74 cents a share, on higher revenue from investment-banking fees. New York-based Citigroup Inc. reports today, while Bank of America Corp. is scheduled to report tomorrow, about an hour before Wells Fargo.
Wells Fargo caught up last month with Charlotte, North Carolina-based Bank of America and JPMorgan, based in New York, by repaying its $25 billion in government bailout funds. The repayment reduced income for common shareholders by $2 billion during the quarter, according to the company, while saving $1.25 billion a year in TARP dividend payments.
“The $2 billion will bring down overall earnings but I think people will look through that as a non-core number,” said Jennifer Thompson, whose recommendations at New York-based Portales Partners LLC returned 27 percent in the past year, the best showing among analysts who cover Wells Fargo. “There is a good chance that the reserve-building will come down.” She has a hold rating on the shares.
Building Reserves
The bank added $1 billion to reserves in the third quarter, bringing the total allowance for loan losses to $24 billion, or 3 percent of total loans. Consumer loan losses will peak in the first half of this year, while commercial loan losses will top out in the second half, the company predicted in October.
“Wells Fargo remains among the healthiest of the large banks because of its strong core earnings power,” Oppenheimer & Co. analysts led by Chris Kotowski wrote in a Dec. 18 report. Still, earnings won’t be as high as the second and third quarters, “mainly because of a projected decrease of $1.6 billion in mortgage banking revenues from what we viewed as unsustainably high levels,” they wrote.
Wells Fargo has been dueling Bank of America for the No. 1 ranking among U.S. home lenders, with the lead changing hands at least twice in 2009. Mortgage banking revenue at Wells Fargo climbed to $3.1 billion in the third quarter and probably fell to $1.5 billion in the fourth, Oppenheimer analysts said. Credit Suisse Group AG analysts led by Moshe Orenbuch expect mortgage revenue of $2.2 billion, according to a Jan. 7 report.
Home Lending
Mortgage applications in the U.S. fell 29 percent in the fourth quarter over the preceding three months, according to the Mortgage Bankers Association, as rising interest rates discouraged homeowners from refinancing.
Wachovia specialized in option-ARM mortgages, which allow homeowners to defer some payments on their adjustable-rate home loans and add them to the principal. Home prices in some of the largest urban areas in California have dropped about 38 percent from their peak in 2005 and 2006, according to S&P/Case-Shiller home price indexes, and that left borrowers owing more than their homes are worth.
“They have been optimistic that the option-ARM mortgages from Wachovia have been slightly better than original expectations,” Staite said. “If that is the case, they can release some of those reserves through the net interest income line.”
Exiting TARP allowed Wells Fargo to escape government oversight on executive pay. At the end of December, the lender awarded “retention performance shares” to the top four executives, with Stumpf getting stock valued at $10 million. The bonus pushed Stumpf’s 2009 compensation to $18.4 million.
–Editors: Rick Green, Dan Kraut
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