Wells Fargo: Positive News From a Bank?!

 |  Includes: WFC
by: Todd Sullivan

Just on Tuesday I said, "It is getting to the point where you have Goldman (NYSE:GS), JP Morgan (NYSE:JPM) and Wells Fargo (NYSE:WFC) as the cream of the crop in financials.." Wishing now I had listened to myself and bought more...

Wells Fargo reported yesterday and:

  • Net income of $1.8 billion compared with $2.3 billion a year ago
  • Diluted earnings per share of $0.53 compared with $0.67 a year ago (estimates were for 50 cents)
  • Record revenue of $11.5 billion, up 16 percent from prior year and
    34 percent (annualized) from prior quarter
  • Record cross-sell for both retail and commercial customers
  • Provision for credit losses of $3.0 billion (including reserve
    build of $1.5 billion)
  • Positive operating leverage (revenue growth of 16 percent; expense
    growth of 2 percent from prior year)
  • Average loans up 18 percent from prior year and 8 percent
    (annualized) from prior quarter
  • Average earning assets up 20 percent from prior year and 15 percent
    (annualized) from prior quarter
  • Net interest margin of 4.92 percent, up 23 basis points from prior
  • Tier 1 capital of 8.24 percent, up from 7.92 percent at March 31,
    2008, and 7.59 percent at December 31, 2007

Wells Fargo continued to strengthen its franchise during the second quarter,” said President and CEO John Stumpf. “Earnings per share were 14 cents below that of last year due to $2.3 billion of higher provision expense, including a credit reserve build of $1.5 billion (30 cents per share). We were able to lend more to current customers where we believed it was prudent and properly priced. We grew core deposits while reducing funding costs. We achieved record cross-sell results with our retail and commercial customers – a testament to our relationship-based strategy and our 160,000 team members who serve our customers. We are open for business and getting lots of it. We also continued to benefit from opportunities in this environment to gain new business and customers through selective acquisitions. We maintained a strong balance sheet and, for the 21st consecutive year, increased our dividend. 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 and to build an even stronger company for our team members, customers, communities and shareholders.

Now, is that the most confident bank's exec you have heard in a very long time or what? Wait, let me rephrase, confident and you actually believed what he had to say?

Here is the thing. Unlike the other banks who are writing down loans, shrinking business and recording losses, Wells is still profitable and growing. When these write downs become write ups, earnings will explode. A dividend increase? Did anyone actually expect that?

Wells is superbly positioned (other than JP Morgan (JPM) and Goldman (GS), it is the only one positioned) to take a run at a struggling bank like Wachovia (NASDAQ:WB). In one fell swoop it could expand its base into the Southeast and dramatically expand its footprint. Wachovia may get whacked when it reports another billion dollar loss soon. I would be surprised not to see Wells start picking up smaller regional banks.

Here is the CFO discussing the results and the Earnings call transcript.

Disclosure: Long WFC,WB,GS