Wells Fargo & Company
) has achieved the tenth consecutive quarter of growth in earnings
per share by reporting earnings of 82 cents per share in second
quarter 2012. Results improved from earnings per share of 75 cents
in the prior quarter and 70 cents in the year-ago quarter and were
in line with the Zacks Consensus Estimate.
Second quarter net income applicable to common stock came in at
$4.4 billion, up 9.5% sequentially and 18.1% year over year.
Results at Wells Fargo benefited from improvements in mortgage
banking as well as credit quality. The company experienced record
quarterly mortgage applications and increases in lending to
consumers and businesses. It also reported $400 million in reserve
release (pre-tax), attributable to improved portfolio
The quarter's revenue came in at $21.3 billion, which was also
on par with the Zacks Consensus Estimate. Though revenue slipped
1.6% sequentially, it advanced 4.4% year over year.
Furthermore, segment-wise, on a sequential basis, Wholesale
Banking reported 1.4% growth in revenues while Community Banking
and Wealth, Brokerage and Retirement segments reported drops of
2.5% and 3.0%, respectively.
Performance in Detail
Wells Fargo's net interest income for the quarter came in at
$11.0 billion, up 1.4% sequentially. Net interest margin remained
flat sequentially at 3.91%. Though balance sheet re-pricing in the
present low interest rate environment put pressure on net interest
margin, it was mitigated by increased variable income, including
purchased credit-impaired (PCI) loan resolution income.
Non-interest income at Wells Fargo came in at $10.3 billion,
down 4.6% from the prior quarter. Lower market sensitive revenue,
including a decline in trading gains associated with the deferred
compensation plan investments primarily led to the decrease in net
interest income. However, the fall was partially mitigated by
higher deposit service charges, trust and investment fees, card
fees and mortgage banking revenue.
As of June 30, 2012, total loans were $ 775.2 billion, up 1.1%
sequentially. Commercial loans acquired in the quarter from
WestLB's subscription finance loan portfolio as well as BNP Paribas
SA's North American energy lending business contributed to this
increase. However, it was partially offset by continued run-off in
the non-strategic/liquidating portfolio. Average core deposits were
$880.6 billion, up 5% (annualized) from the prior quarter.
However, non-interest expense at Wells Fargo was $12.4 billion,
down 4.6% from the prior quarter. Lower employee benefits expense,
including lesser deferred compensation expense, and reduced merger
integration costs contributed to this decline in expenses. The
decrease was partially offset by increased revenue-based incentive
compensation and higher severance expense. Efficiency ratio
improved to 58.2% from 60.1% in the prior quarter and 61.2% in the
Notably, for continued momentum in revenue opportunities this
quarter, including a record number of mortgage applications, the
company currently projects its fourth quarter 2012 expenses to be
above its prior target of $11.25 billion. However, for the rest of
the quarters in 2012, non-interest expense is anticipated to fall
from the second-quarter levels.
Wells Fargo saw an improvement in its credit quality trends in
the quarter. It experienced reductions in net losses, nonperforming
assets, nonaccrual loans, as well as loans 90 days or more past,
due and still accruing.
Wells Fargo's allowance for credit losses, including the
allowance for unfunded commitments, totalled $18.6 billion as of
June 30, 2012, down from $19.1 billion as of March 31, 2012.
Net charge-offs were $2.2 billion, or 1.15% (annualized) of average
loans in the reported quarter, down from the prior quarter net
charge-offs of $2.4 billion (1.25%). Provision for credit losses
fell 9.8% sequentially and 2.1% year over year to $1.8 billion in
the reported quarter. Nonperforming assets dropped to $24.9 billion
in the quarter from $26.6 billion in the prior quarter.
For the rest of 2012, the company anticipates improvement in the
credit quality trends but at a modest rate, provided the economy
does not deteriorate substantially. Moreover, future reserve
releases are also projected for the remaining quarters of the
Wells Fargo maintained a solid capital position. The company
purchased 53 million shares of common stock in the quarter.
Moreover, it went for an additional estimated 11 million shares
through a forward repurchase transaction which is expected to be
settled in the third quarter of 2012. It also redeemed $1.8 billion
of trust preferred securities, with an average coupon of 6.31%, on
June 15, 2012.
As a result, Wells Fargo's Tier 1 common equity under Basel I
increased $2.2 billion to $101.7 billion, with Tier 1 common equity
ratio of 10.08% under Basel I as of June 30, 2012. Moreover, its
estimated Tier 1 common equity ratio was 7.78% under the latest
Basel III capital proposals.
The Tier 1 leverage ratio was 9.25% as of June 30, 2012, down
from 9.35% as of March 31, 2012. Tier 1 capital ratio was 11.68% as
of June 30, 2012 compared with 11.78% as of March 31, 2012. Book
value per share improved to $26.06 from $25.45 in the prior quarter
and $23.84 in the prior-year quarter.
We believe that over the long term, investors should not be
disappointed with their investments in Wells Fargo given its
diverse geographic and business mix which enable it to sustain
consistent earnings growth. Going forward, we believe that
strategic acquisitions will help expand Wells Fargo's business and
improve its profitability.
In fact, Wells Fargo's growth plans have historically included a
large number of acquisitions, Wachovia being the largest addition
in December 2008. Recently, in an effort to boost its subscription
finance business, Wells Fargo has agreed to buy WestLB's $6 billion
subscription finance portfolio.
Wells Fargo is capitalizing on the deleveraging activities of
the European banks. In February, Wells Fargo agreed to acquire the
North American energy lending business of BNP Paribas with nearly
$9.5 billion of loan commitments and approximately $3.9 billion in
loans outstanding. The acquisition was closed in April 2012.
Moreover, in 2011, Wells Fargo also made loan portfolio purchases
Bank of Ireland
Allied Irish Banks
We believe that long-term investors who can absorb the risks
related to economy and regulations can expect decent growth in
Wells Fargo's earnings in the future. Solid capital levels, expense
management as well as improved credit quality will also support its
profit figures. Its stress test clearance and subsequent dividend
hike as well as plan to increase share buybacks in 2012 also boost
Yet, we believe the top-line headwinds would persist, given the
protracted economic recovery. Plus, a low interest rate environment
would keep its margins under pressure. Wells Fargo's unrelenting
legacy mortgage issues also remain a concern. With the thrust of
new banking regulations, there will be pressure on fees and loan
growth could remain feeble.
Wells Fargo currently retains a Zacks #3 Rank, which translates
into a short-term Buy rating. Considering the fundamentals, we also
maintain a Neutral recommendation on the stock. Reflecting an
upbeat sentiment post the release of the company's results, the
stock is trading at a premium.
Concurrent with Wells Fargo,
JPMorgan Chase & Company
) also kicked off the earnings season for the banking sector by
reporting today. JPMorgan reported earnings per share of $1.21
compared with $1.27 in the year-ago quarter. Notably, its results
included $4.4 billion in its Chief Investment Office's synthetic
All eyes are set on the next week when a host of the Wall Street
big shots report their second quarter results. Among them,
) will report on July 16, while
Goldman Sachs Group Inc.
) will report on July 17 and
Bank of America Corporation
) on July 18.
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