Despite Wells’ profit stunner, some analysts have doubts
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Did a turning point for Wells Fargo & Co. and the entire banking industry arrive this morning with Wells’ announcement that it would report first-quarter earnings of $3 billion? The market seemed to think so, but not all analysts were convinced.
The projected profit of about 55 cents a share, disclosed in a sneak peek at the San Francisco bank’s official earnings release next week, was more than double Wall Street’s consensus prediction of 23 cents.
While Wells provided relatively few details, Chief Financial Officer Howard Atkins said the company’s mortgage business was booming and its takeover of Wachovia Corp. was working out better than expected.
Wells also said its ratio of tangible common equity to assets -- a conservative net-worth gauge that analysts have been focusing on this year -- would exceed 3.1%, above the 3% level often considered a benchmark of strength.
Not only were Wells’ shares up 32% for the day, to $19.61, but also the BKX index of major bank stocks jumped 20%. As my colleague Tom Petruno noted in this post, covering by ‘short sellers’ probably played a role in the action. Nonetheless, the bank rally drove the broader market higher as well, with the Dow Jones industrials gaining 246.27 points, or 3.1%, to 8,083.38.
The big surprise for analysts was Wells’ first-quarter provision of $4.6 billion for potential loan losses -- a huge amount, to be sure, but markedly lower than Wall Street had expected.
For example, FBR Capital Markets number crunchers had projected a set-aside of $6.25 billion for losses. In a skeptical note to investors, FBR -- which has a ‘sell’ rating on Wells -- said, ‘We believe that credit quality materially deteriorated in the first quarter and that Wells Fargo is under-reserving for expected future losses.’
The FBR analysts, led by Paul Miller, said they were withholding judgment until they could see how accounting adjustments for the Wachovia takeover had affected the results. They also wanted to assess details of problems in Wells’ loan portfolio, particularly the tricky adjustable-rate mortgages that were largely responsible for Wachovia’s downfall.
At Keefe, Bruyette & Woods, analysts who rate Wells a ‘hold’ said they were ‘positively surprised’ that major cost savings from the Wachovia deal already appear to be kicking in. The KBW team, led by Frederick Cannon, had expected a credit-loss provision of $5.4 billion.
Bank analyst Bart Narter, a senior vice president at research firm Celent, said Wells benefited by acquiring wobbly Wachovia -- which with its huge East Coast presence gave Wells a national footprint -- and from the complications of rivals’ mergers.
Wells is ‘twice the bank it was last year, due to the Wachovia acquisition,’ Narter noted, going on:
Wells boosted confidence in the Wachovia network, stopping the flight of deposits. In the meantime, two competitors in its key West Coast markets were distracted: Washington Mutual was acquired [by JPMorgan Chase & Co.] and Bank of America had the Merrill [Lynch] acquisition to contend with. Combine this with a flight to quality, and Wells wins big on both coasts.
Of other banks’ first-quarter results, Narter said, ‘Few will see so many factors working in their favor at the same time.’
-- E. Scott Reckard