Wells Fargo to report record profits

Wells Fargo to report record profits
By Alan Rappeport in New York
Copyright The Financial Times Limited 2009
Published: April 9 2009 16:08 | Last updated: April 9 2009 16:57
http://www.ft.com/cms/s/0/8cccae00-2516-11de-8a66-00144feabdc0.html


Wells Fargo on Thursday lifted hopes for the stricken banking sector by announcing that it would report record first-quarter profits of $3bn later this month.

The San Francisco-based bank said it expected to report net income of 55 cents a share, more than double what analysts were anticipating, due to strong performance in its mortgage banking business and a smoother-than-expected integration with Wachovia, which it acquired last year.

Shares of Wells Fargo surged by 22.23 per cent to $18.20 in mid-morning New York trading. Rivals Bank of America, JPMorgan Chase and Citigroup, rose 18.70 per cent, 12.63 per cent and 8.52 per cent, respectively.

“Our business momentum is strong, and we expect our operating margins to remain at the top of our peer group,” John Stumpf, Wells Fargo’s chief executive, said in a statement.

Wells said it expected $20bn of revenue, beating the consensus estimate of $18.8bn. The lender said it saw $100bn in mortgage originations and a 41 per cent rise in unclosed applications, signalling a healthy second quarter for mortgage originations as hopes rise that the housing market may be approaching a bottom.

“Business momentum in the quarter reflected strength in our traditional banking businesses, strong capital markets activities, and exceptionally strong mortgage banking results,” said Howard Atkins, Wells Fargo’s chief financial officer.

At an event in Washington, President Barack Obama urged US homeowners to refinance their properties and take advantage of historically low interest rates made possible by government intervention.

”There are 7m to 9m people across the country who right now could be taking advantage of lower mortgage rates,” he said at a meeting with homewners who have already reduced their mortgage payments. ”We estimate that the average family can get anywhere from $1,600 to $2,000 a year in savings by taking advantage of these various mortgage programmes that have been put in place.”

Mr Obama added that Fannie Mae had refinanced $77bn of mortgages last month, the highest level since 2003, but cautioned homewoners against mortgage scams.

His call for homeowners to refinance their mortgages reflects the growing role of government intervention in the US economy and follows his promise last month that the US government ”stands behind” service and repair warranties from General Motors and Chrysler.

Increasing refinancings and a reduction in forelosures will benefit Wells Fargo’s business. Last year’s acquisition of Wachovia, which broke its decade-long strategy of avoiding large acquisitions, has also added to the positive results. According to Wells, Wachovia contributed 40 per cent to combined revenue as loan, deposit and client business activity resumed.

“Wachovia’s outstanding franchise has proven to be everything we thought it would be when we announced this acquisition, and the financial contribution from Wachovia exceeded our expectations in the first quarter,” Mr Stumpf said.

Wells said that it had extended $225bn of credit to US taxpayers since last October, which is nine times what it received from the US Treasury’s capital investment scheme.

In March, Wells slashed its quarterly dividend from 34 cents a share to 5 cents in an effort to bolster capital against rising credit losses. The cut came amid mounting scrutiny of bank capital positions.

The bank said on Thursday that its tangible common equity – a closely watched measure of financial health– would be above 3.1 per cent in the first quarter, up from 2.86 per cent at the end of last year.

Mr Stumpf indicated last month that operating results for the first two months of the year had been strong, adding that the US Treasury’s $25bn capital investment in the bank was generating a return for the US taxpayer at significant cost to Wells Fargo.

Nevertheless, Mr Stumpf had said the dividend cut and expense reductions were “the right things to do” as they would help the bank repay the government’s investment “at the earliest practical date”.

Wells Fargo did not say on Thursday when it would repay government funds.

Additional reporting by Daniel Dombey in Washington