Earnings Preview: Eyes on Wells Fargo loan losses

By SARA LEPRO

posted: 35 DAYS 21 HOURS AGO

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NEW YORK -Wells Fargo & Co. reports earnings for the fiscal third quarter on Wednesday. The following is a summary of key developments and analyst opinion related to the period.

OVERVIEW: Wells Fargo, the nation's fourth largest bank by assets, is one of the last of the big banks to report its quarterly results. Analysts are expecting the San Francisco-based company to follow its peers in reporting more loan losses, but how much more is the big question.

Wells Fargo is considered one of the stronger, more conservatively managed large banks. But investors are still worried about credit quality in the loan portfolio it acquired as part of its purchase of Wachovia Corp. last fall after the Charlotte, N.C.-based bank crumbled under the weight of shaky mortgage loans and other bad bets on the housing industry.

JPMorgan Chase & Co., Citigroup Inc. and Bank of America Inc. rattled investors last week when their results showed that loan losses remain high, which means consumers and businesses are still having trouble paying off their debts.

The losses at JPMorgan and Citigroup, however, were offset by robust trading activity. Goldman Sachs Group Inc. also reported solid profits from trading. However, it's clear from the results that traditional banking is still weak. And that is a troublesome sign for the economy, the growth of which relies on the flow of easy credit to businesses and consumers.

Though Wells Fargo has a smaller trading operation than some of its big-bank counterparts, the bank has had much success in growing its mortgage banking business.

Income generated from mortgage banking more than doubled in the second quarter from the prior-year period.

Analysts have warned that the increase in mortgage-banking activity is likely not sustainable over a long period of time. Still, Wells Fargo had $90 billion of unclosed mortgage applications in the pipeline at the end of the second quarter.

BY THE NUMBERS: Analysts are expecting Wells Fargo to post earnings of 36 cents per share and revenue of $21.63 billion, according to a poll by Thomson Reuters. In the third quarter of last year, Wells Fargo earned 49 cents per share and had revenue of $10.38 billion, prior to the close of the Wachovia acquisition.

ANALYST TAKE: Fox-Pitt Kelton analyst Andrew Marquardt recently lowered his earnings estimate on the bank to 45 cents per share from 47 cents, citing expectations for lower mortgage banking revenue and slightly worse credit trends. But Marquardt also said Wells Fargo is his top pick among large-cap banks, given its ability to manage the difficult credit environment.

WHAT'S AHEAD: Wells Fargo is still working toward repaying the federal government $25 billion in bailout funds it has received since last fall. The bank has stressed that it wants to repay the money as soon as possible, but do so in a way that won't dilute shareholders' stakes.

The bank's chairman, Dick Kovacevich will step down at the end of this year after staying in the post an extra year to help the bank navigate the financial crisis. CEO John Stumpf will take on the additional role of chairman on Jan. 1.

STOCK PERFORMANCE: During the quarter, Wells Fargo's stock rose 16.2 percent to close at $28.18 on September 30. This compares with a 15 percent increase in the Standard & Poor's 500 index. Wells Fargo's stock is down about 6 percent from year-ago levels.

2009-10-20 06:34:27