Wells Fargo earnings: Deposits up ... Loans weak

Profit Rises at Wells Fargo


San Francisco-based Wells missed analyst earnings expectations for the first time in over two years, and two measures closely watched by investors—revenue, or the income a bank accrues before expenses, and net interest margin, or the spread the bank earns between the funds it borrows and the money it lends out—declined from a year earlier.

The disappointing quarter from Wells, the fourth-biggest U.S. lender by assets, is the latest sign of a banking industry struggling with a weak economy that saps loan demand and low interest rates that constrain profit opportunities from deposits. Bank shares, which have been under pressure throughout 2011, tumbled anew amid signs European leaders won't be able to fully resolve by next week the sovereign-debt problems that have weighed on markets.

Shares of Wells Fargo, the most valuable U.S. financial firm by market capitalization, dropped $2.25, sliding 8.4%, to $24.42 in 4 p.m. New York Stock Exchange composite trading.

Wells Fargo's Margin Slips


Wells Fargo & Co.'s first disappointing quarterly results in more than two years are a particularly bad omen for other banks because of a continuing slide in the company's net interest margin.

Net interest margin, or the spread earned between the funds borrowed by a bank and the money it lends out, is one of the U.S. banking industry's biggest earnings engines.

At Wells Fargo, based in San Francisco, net interest margin fell to 3.84%, the fourth consecutive decline. Wells Fargo blamed the problem on its inability to lend enough of the deposits pouring into the bank. The decline overshadowed a 21% jump in third-quarter net income, which rose to $4.1 billion, as Wells Fargo's deposit base expanded and nonperforming assets fell. It said its growth in loans and capital was "solid."

Wells Fargo shares sank 8.4%, or $2.25, to $24.42 in New York Stock Exchange composite trading at 4 p.m.

Analysts and investors were particularly surprised because Wells Fargo long has been considered one of the least vulnerable banks to margin pressure because of its low-cost deposits and steady lending.


Wells Fargo's net interest margin still is better than the 3.59% average of banks with more than $1 billion in assets, according to the latest figures from the Federal Deposit Insurance Corp. In last year's third quarter, Wells Fargo's net interest margin was 4.25%.

Analysts at Keefe, Bruyette & Woods Inc., a research firm, expect net interest margins to be down across the board in the third quarter. The biggest declines are projected at regional banks such as U.S. Bancorp, PNC Financial Services Group Inc. and KeyCorp.

Deposits at Wells Fargo jumped 10% from last year's third quarter to $850 billion, but total loans rose just 1%.

The strongest loan growth came from loans to businesses. Outstanding business loans surged 7.3% compared from last year's third quarter, but the yields on such loans fell.

Wells Fargo executives said the latest deposit growth is a sign of strength that will pay off when the economy recovers.

Comment: We have limited exposure to WFC.

1 comment:

  1. More on investing in financials: Are US Financials a Buy?


    fund manager Bill Smead disagrees, saying the sell-off in the shares of U.S. banks this year is exactly the reason to be buying into the sector. The CEO & CIO of Seattle-based Smead Capital Management - who likes and owns shares of Wells Fargo (NYSE:WFC - News) and Berkshire (: BRK) - believes U.S. financial stocks are now "deeply undervalued", based on price-to-book ratios and price to normalized earnings.

    "The second thing is... we feel like we're getting close to the end of that down-swing because the people that are overweight financials are paying a very, very stiff price for it right now," he said, adding that while financial stocks could still see some pain, investors with a medium to long term horizon could do well.

    "If you have a three-to-five year timeframe, and you're buying the Wells Fargos of the world here, at maybe six times normalized earnings, in three years you're going to feel great, even though you might have been sick to your stomach for the next couple of months," Smead noted.

    For Young, the greatest risk for the financial sector is the Europe debt crisis, and advises investors to steer clear unless there is a "clear way" out of Europe.

    "The biggest reason that we're still scared of the banks is Europe," Young said. "That situation...is still far from being resolved, despite these short-covering rallies that we see from time-to-time."

    "If that situation gets worse, the amount of pain that can be inflicted on you if you own the large money-centered banks, anywhere in the world, not just in Europe, but in Asia, or the U.S., it's just tremendous," he warned.



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