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Wells Fargo Still Facing Credit Losses: Analysts

Shares of Wells Fargo gave up some of their recent gains on Monday but are off morning lows, after analysts warned that the bank still could be facing mounting credit losses and need more capital.

Last Thursday, the San Francisco-based bank said it would report record first-quarter profit of $3 billion, easily surpassing analysts' expectations. Shares of Wells Fargo surged 32 percent Thursday after the announcement. The market was closed Friday.

Wells Fargo shares gave up a small portion of those gains Monday, falling about 2 percent on the New York Stock Exchange. Earlier in the session shares fell as low as $18.51.

Keefe, Bruyette & Woods analyst Fred Cannon downgraded Wells Fargo to "Underperform" from "Market Perform," based on the bank's current stock price. Cannon affirmed a price target of $12 for Wells Fargo and, in a research note, said he is concerned about the lack of details surrounding how the bank managed to report a record preliminary profit.

Cannon also said Wells Fargo still might need an additional $50 billion in common equity over the next two years to cover loan losses and to repay the government the $25 billion it provided to Wells Fargo last fall as part of the bank investment program.

Friedman, Billings, Ramsey analyst Paul Miller said the lack of details provided with the early earnings announcement is a cause for caution.

"Announced earnings surprised on the upside, largely based on lower credit costs and net charge-offs, but Wells Fargo gave no details on delinquency trends or Wachovia's credit losses," Miller wrote in a research note. Wells Fargo acquired Wachovia late last year.

There is little detail about if charge-offs—loans written off as not being collectible—were better because of actual improvement in credit quality trends or if accounting adjustments tied to the purchase of Wachovia accounted for the better-than-expected results, Miller wrote in the note.

Miller reiterated an "Underperform" rating and warned under-provisioning for loan losses "may come back to haunt" Wells Fargo in future quarters.

Wells Fargo said charge-offs are expected to total $3.3 billion for the first quarter, compared with a combined $6.1 billion between Wells Fargo and Wachovia during the fourth quarter. The bank said its loan-loss provision will total about $4.6 billion for the first quarter, including adding $1.3 billion to its credit reserves.

KBW's Cannon projected a first-quarter loan-loss provision of $5.4 billion and charge-offs of $5.2 billion.

Aside from the accounting effects for the Wachovia deal, Wells Fargo's loan losses could have also been helped by foreclosure moratoriums put in place by many banks in recent months.

Banks