Wells Fargo, the fifth-largest U.S. bank, reported surprisingly strong quarterly results and raised its dividend, easing investor fears about mortgage losses and causing its shares to soar on Wednesday.
Profit fell 23 percent as the bank, which is also the nation's second-largest mortgage lender, more than quadrupled the amount it set aside for credit losses because more customers failed to make loan payments.
Results nevertheless benefited from an expanded lending margin and higher mortgage, insurance and credit card fees.
In afternoon trading, Wells Fargo shares were up $4.93, or 24 percent, to $25.44. The 24-member KBW Bank Index rose 9 percent, after having fallen 45.3 percent this year.
"Stronger banks will benefit handsomely from the credit crisis, and investors view Wells Fargo as a high-quality institution that can take advantage of stress in the market," said Chris Hagedorn, who helps invest $21.4 billion at Fifth Third Asset Management in Cincinnati.
Net income for San Francisco-based Wells Fargo fell to $1.75 billion, or 53 cents per share, from $2.28 billion, or 67 cents, a year earlier, the third-straight quarterly decline.
Revenue rose 16 percent to a record $11.5 billion, while expenses increased just 2 percent.
Analysts, on average, expected profit of 49 cents per share on revenue of $10.7 billion, Reuters Estimates said. The bank raised its quarterly dividend 10 percent to 34 cents per share. Many rivals are cutting their payouts to preserve capital.
Weathered the Crisis
Wells Fargo weathered the credit crisis better than many other banks by limiting its exposure to subprime mortgages and other risky home loans. It remains profitable even as rivals such as Citigroup , Wachovia and Washington Mutual pile up credit losses and face capital shortages.
"We're still affected by the weak economy, but we believe we're one of the best positioned in financial services to grow through this adversity," Chief Executive John Stumpf said in a statement. "We are open for business and getting lots of it."
Wells Fargo is the first of the five largest U.S. banks to report results. JPMorgan Chase is slated to report on Thursday, Citigroup on Friday, Bank of America on Monday and Wachovia on Tuesday.
Billionaire Warren Buffett's Berkshire Hathaway is Wells Fargo's largest investor, owning 8.8 percent of its stock as of March 31, Thomson ShareWatch said.
Wells Fargo set aside $3.01 billion, up from $720 million a year earlier, and net charge-offs more than doubled to $1.51 billion. Nonperforming assets nearly doubled to $5.23 billion.
The bank said its new policy of writing off home equity loans where payments were more than 180 days late, rather than 120, resulted in the deferring of $265 million of charge-offs.
Fee income from mortgage banking rose 74 percent to $1.2 billion, despite a 21 percent decline in loan originations. Insurance fees jumped 27 percent to $550 million, while credit card fees rose 14 percent to $588 million.
"Opportunities to Grow"
"The credit crisis is giving us plenty of opportunities to grow," Chief Financial Officer Howard Atkins said in an interview. He said the bank is probably adding market share in middle-market commercial banking, retail mortgages, and mutual funds and asset management.
Net interest margin, the difference between what the bank earns on loans and pays on deposits, rose to 4.92 percent from the first quarter's 4.69 percent, and from 4.89 percent in last year's second quarter.
Profit fell 18 percent to $1.23 billion from retail banking, and 10 percent to $557 million in wholesale business banking. Wells Fargo Financial, which lends to less credit-worthy people, generated a $38 million loss.
The bank said it sells an average 5.6 products to each retail customer and a record 6.3 to each business customer, a result of its key strategy of "cross-selling" multiple products for each customer.
Wells Fargo's Tier-1 capital ratio, which measures its ability to cover losses, rose to 8.24 percent from 7.92 percent at the end of March. Regulators consider 6 percent sufficient.
The bank said it has about 3,318 branches in 23 U.S. states, and $609.1 billion in assets.