Wells Fargo Q4 net slides on home equity loss

Customers walk into a Wells Fargo bank branch in suburban Denver, Colorado October 18, 2006. Wells Fargo on Wednesday said fourth-quarter profit fell, the first decline in more than six years, hurt by rising losses from home equity loans.

NEW YORK (Reuters) - Wells Fargo & Co (WFC.N), the No. 2 U.S. mortgage lender, said on Wednesday fourth-quarter profit fell 38 percent, the first decline in more than six years, as more people missed payments on mortgages and home equity loans.

Shares, nevertheless, rose as much as 6.1 percent as the earnings decline was smaller than expected, while deposits and loans grew at a double-digit pace.

The results reflect how deteriorating housing and credit markets have affected even mortgage providers like Wells Fargo, whose lending practices are considered conservative.

Wells Fargo, the fifth-largest U.S. bank, set up a $1.4 billion reserve tied to home equity loans that went bad. Yet it has so far avoided the massive exposures to subprime and other risky loans that have caused big losses at rivals such as Citigroup Inc (C.N) and Merrill Lynch & Co MER.N.

"Except for the admitted slip of getting involved in third-party home equity loans, they've done a fine job in a challenging market in avoiding credit missteps," said Thomas Russo, who oversees more than $3 billion at Gardner, Russo & Gardner in Lancaster, Pennsylvania, including 4 percent in Wells Fargo shares.

Net income fell to $1.36 billion, or 41 cents per share, from $2.18 billion, or 64 cents, a year earlier. Revenue rose 8 percent to $10.21 billion.

Analysts, on average, expected profit of 39 cents per share on revenue of $10 billion, according to Reuters Estimates.

Wells Fargo tripled the amount it set aside for loan losses to $2.6 billion, including the home equity reserve. Net charge-offs rose 67 percent to $1.21 billion.

The San Francisco-based bank also said problems affecting mortgages may be spilling into other forms of consumer credit. In the last three months of 2007, consumer loans at least 90 days past due rose 23 percent to $1.44 billion as credit card delinquencies rose 33 percent to $402 million.

"We expect the environment to remain challenging in 2008, particularly in the consumer sector," Chief Executive John Stumpf said in a statement. In November, he said the housing market was in its worst shape since the Great Depression.

In afternoon trading, Wells Fargo shares were up 79 cents, or 3 percent, at $27.28 on the New York Stock Exchange. The bank has about 3,283 branches in 23 U.S. states, and $575.4 billion in assets.

"VERY WEAK" HOUSING OUTLOOK

Among rivals, JPMorgan Chase & Co (JPM.N) said Wednesday profit fell 34 percent as it wrote down $1.3 billion tied to subprime mortgages and set aside 83 percent more for loan losses. Citigroup on Tuesday posted a record $9.83 billion quarterly loss due to subprime and other credit problems.

Struggling Countrywide Financial Corp CFC.N, the largest U.S. mortgage lender, agreed on Friday to be acquired by Bank of America Corp (BAC.N) for $4 billion.

In an interview, Chief Financial Officer Howard Atkins said he expects housing to remain "very weak" in 2008, adding that downward pricing pressure is already evident in Arizona, central California, Florida and Nevada.

"One shouldn't discount the possibility of higher credit losses, given what's going on in the housing market and the economy," he said. "Having said that, the business growth of the company was very strong in the fourth quarter. That really does represent the difference between us and many big banks."

Moody's Investors Service affirmed Wells Fargo's "Aa1" credit rating, its second highest grade. It said the bank has enough capital and flexibility to absorb a "relatively high level" of expected charge-offs in the next 1-1/2 to two years.

Home equity loans typically let people with good credit borrow against their residences, often to fund home repairs or pay off credit card debt. But in recent years, more people used them as second mortgages to buy homes with little or no money down, only to end up overstretched. Wells Fargo has scaled back offering home equity loans through brokers.

"We did not fully appreciate the severity of the residential real estate downturn," Chief Credit Officer Mike Loughlin said in a statement.

Profit slumped 55 percent to $693 million from retail banking and fell 51 percent to $78 million at Wells Fargo Financial, which lends to less creditworthy people. Profit from wholesale business banking rose 20 percent to $590 million.

Mortgage lending totaled $56 billion, down from $70 billion a year earlier. Other lenders have projected larger declines.

Net interest margin dipped to 4.74 percent from 4.83 percent, but rose from 4.55 percent in the third quarter. It remains among the highest in the industry.

Billionaire Warren Buffett's Berkshire Hathaway Inc (BRKa.N)(BRKb.N) is Wells Fargo's largest investor, owning 8.3 percent of its stock as of Sept 30, Thomson ShareWatch said.

(Editing by Mark Porter/Jeffrey Benkoe)