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Wells Fargo Q3-Q4 Will Be 'More Challenging': Strategist

Published: Wednesday, 22 Jul 2009 | 1:09 PM ET

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By: JeeYeon Park
CNBC News Associate

Wells Fargo reported a record quarterly profit on Wednesday and Edward Najarian, head of bank research at ISI Group, shared his insights on the bank and its results.

“A very significant portion of the earnings came from mortgage origination revenue at $2.2 billion, which was a very strong number that is unlikely to recur because the mortgage refinance boom has subsided,” Najarian told CNBC.

“And there has been about $1 billion of revenue from a net hedging game on mortgage servicing rights. If we normalize that, we’d lose about 20 to 25 cents a share on earnings.”

Najarian said Wells Fargo [WFC Loading... () ] saw a deterioration in credit quality with credit losses rising to 211 from 154 basis points in the first quarter, a 50 percent increase in the non-performing assets — and not a very large build in the loan-loss reserve for future quarters, compared to other banks such as JPMorgan Chase [JPM Loading... () ] and Bank of America [BAC Loading... () ].

“[Wells Fargo’s] stock has run up quite substantially over the last several months... However, we think the third and fourth quarters will be more challenging for this company and will put some pressures on this stock,” he said.

“That’s probably likely to compress the stock a little further. Once it gets to a cheaper valuation, it’s probably more attractive. But we would be on the sidelines at this point.”

The Long-Term Picture

Although many analysts expressed worry Wells Fargo will need to raise more capital to cover losses from real estate loans, including the option adjustable-rate mortgages it inherited when it bought Wachovia, Najarian said the acquisition will work out fine in the long run for the bank.

"It’s going to create a lot of positive earnings leverage for the company in the long-run," he said.

What About Morgan?

In the meantime, Morgan Stanley [MS Loading... () ] reported a second-quarter loss of $159 million that was significantly worse than analyst expectations. Watch the video for more on what George Ball, chairman of Sanders Morris Harris Group, had to say about the numbers.