Wells Fargo & Company (NYSE:WFC) continued the big bank earnings parade this week, as it reported a profit increase for the quarter and full year. Revenue, however, was basically flat. While there were improvements in a number of business segments, there are concerns over net margins and the bank's mortgage business

IN PICTURES: 7 Ways To Position Yourself For Recovery

Record Income
Wells Fargo reported record income of $3.4 billion or 61 cents per diluted share, up from $2.82 billion or 8 cents a share in the year ago quarter. Increases across the board in credit quality, strength in core deposits, as well as the integration of its Wachovia purchase, all formed part of the backdrop for the bank's financial performance. The bank reported improvement in all credit metrics, including a decrease in net charge offs. Capital ratios improved also, with Tier 1 capital increased from 9.3% at the end of 2009, to 11.3% at the end of 2010.

CEO John Stumpf pointed to the US economy, which showed signs of improvement, as helping the bank's performance. Several business segments saw improvement, led by wholesale banking. The record income extended also for the full year, as the bank earned $12.36 billion or $2.21 per diluted share in 2010, compared to $12.28 billion or $1.75 per diluted share in 2009 .

Revenue Off
Revenue for the quarter fell to $21.49 billion from $22.7 billion in the fourth quarter a year ago. Mortgage banking, which comprises a significant portion of Wells' core revenue, showed the effects of slackening refinancing activity. Further possible mortgage issues loom. Investors should note net interest margins, which declined, from 4.31% in the year ago quarter to 4.16%. For the year, net interest margin declined slightly from 4.28% to 4.26%. Full year revenue for 2010 was $85.21 billion compared to $88.69 in 2009.

Market Reaction, Street Concern
Wells Fargo stock was off slightly even before the report, likely collateral damage from the market's unhappiness with Citigroup's (NYSE:C) earlier report. Wells' numbers were either a close miss or in line, depending on which analyst figures investors use. The underlying concern for the Street, though, is the exposure to mortgage risks in the foreclosure and servicing areas.

Mortgage Repurchase Issue
While rivals Bank Of America (NYSE:BAC) and JP Morgan Chase (NYSE:JPM) reached settlements with Federal National Mortgage Association (OTC:FNMA) and Federal Home Loan Corporation (OTC:FMCKN), which capped potential losses, Wells Fargo is not seeking such a settlement. CFO Howard Atkins emphasized the problems were small for the bank, and maintained that the quality of the securitizations of the loans was higher than those of its competitors.

Wells Fargo Outlook
The bank itself sees strong continued strong growth for 2011 and emphasized its long-term positioning. The bank's net interest margin is still higher than its rivals, it points out, and stems from its core deposit strength. Although the slowing mortgage business along with the repurchase issue are legitimate investor concerns, Wells Fargo management feels the mortgage issues will be worked out without either the drama or damage critics see. Long-term investors should pay attention anyway and take nothing for granted, although Wells Fargo's traditional strength in consumer banking makes it a great candidate to thrive further as the economic recovery takes better hold. Take the long view; the bank is getting healthier. (Both parts of the market cycle present major opportunities for savvy investors. Check out Banking Profits In Bull And Bear Markets.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Filed Under:
Tickers in this Article: WFC, C, BAC, JPM, FNMA.OB, FMCKN.OB

comments powered by Disqus

Trading Center