Wells Fargo Profit Hurt by Credit Pressures
By Jonathan Stempel
NEW YORK (Reuters) - Wells Fargo & Co (WFC.N) said on Tuesday third-quarter profit rose 4 percent, the slowest pace in more than six years, hurt by rising losses from home loans that it expects to increase further.
Earnings set a record, but fell short of forecasts, at a bank considered among the industry's best at managing risk.
Credit losses are mounting industrywide as the U.S. housing sector slumps and credit markets tighten. Wells Fargo is the nation's No. 5 bank and one of its largest mortgage lenders.
"It was a tough environment," Chief Financial Officer Howard Atkins said in an interview. "Credit markets seized up and the housing market took another downturn."
In afternoon trading, Wells Fargo shares fell $1.43, or 4 percent, to $34.52 on the New York Stock Exchange.
The bank's net income rose to $2.28 billion, or 68 cents per share, from $2.19 billion, or 64 cents, a year earlier.
Revenue rose 10 percent to $9.85 billion. Results included a $160 million gain from a sale of $27 billion of low-yielding mortgage securities.
The San Francisco-based bank reported $490 million of write-downs related to mortgages.
Wells Fargo also said home equity losses rose more than fivefold to $153 million. It expects such losses to rise in the fourth quarter and stay "elevated" in 2008.
Net credit losses totaled $892 million, up 35 percent from a year earlier and 24 percent from the second quarter.
Analysts on average expected profit of 70 cents per share on revenue of $10.02 billion.
"The real story was weaker-than-expected credit trends and an associated increase in provision expense, which are likely to reduce future earnings," wrote Gary Townsend, an analyst at Friedman, Billings, Ramsey & Co. He downgraded Wells Fargo to "market perform" from "outperform."
DIFFICULT ENVIRONMENT
Wells Fargo said almost half its increase in credit losses was in home equity, hurt by declining home prices, and the rest was in auto loans and unsecured consumer credit.
Payments on $1.26 billion of loans were at least 90 days late as of Sept. 30, up 16 percent from the end of June.
Net interest margin tumbled to 4.55 percent from 4.89 percent in the second quarter. Wells Fargo said it bought $17 billion of securities late in the quarter, which it said should benefit the margin in the fourth quarter.
Rivals that have also posted higher credit losses include Citigroup Inc (C.N) on Monday and U.S. Bancorp (USB.N), Regions Financial Corp (RF.N) and KeyCorp (KEY.N) on Tuesday.
Through Monday, Wells Fargo shares had risen 1 percent this year, compared with a 10 percent drop in the Philadelphia KBW Bank Index .BKX.
MIDDLE OF THE FAIRWAY
Net interest income rose 5 percent to $5.28 billion, while fee income rose 18 percent to $4.57 billion.
Profit rose 8 percent to $1.61 billion from retail banking, and 6 percent to $543 million from wholesale business banking. At Wells Fargo Financial, which lends to less credit-worthy people, profit fell 29 percent to $135 million.
Customers also bought more products. The bank said it sold an average of 5.5 products to each retail customer and 6.1 to each business customer, up from three each when Norwest Corp and Wells Fargo merged in 1998.
Compared with the second quarter, home loan applications fell 17 percent to $95 billion and residential lending fell 15 percent to $68 billion.
Atkins said the bank is adding market share as weaker or less prudent rivals contract. Wells Fargo has long said it could better withstand mortgage market turmoil because it refrained from exotic home loans.
"We have over time stayed in the middle of the fairway," he said. "What we're now doing is further tightening up on lending standards."
Billionaire Warren Buffett's Berkshire Hathaway Inc (BRKa.N)(BRKb.N) is the bank's largest investor, owning 7.7 percent of its stock as of June 30, Thomson ShareWatch said.
Wells Fargo has more than 3,200 branches in 23 U.S. states, mainly in the western two-thirds of the country and $548.7 billion of assets.
