Wells Fargo (WFC)

WFC announced it would be cutting its government indebtedness – like many other bailout recipients – but more importantly, it stated that it would not dilute shareholder equity to do so. Score another win for Warren Buffett’s influence. ^[1]

The significant deduction for loss losses should wane in coming years and eventually regress to pre-crisis levels. At which point it would yield a doubling of earnings. The reason being that housing starts have fallen to their lowest level in history while household formations have wavered only somewhat since the recession.

Couple this with a concentrated commercial banking market and earnings could see a further increase.

Wells Fargo & Company is well established in the United States, with a large variety of businesses and a solid and rapidly expanding client base. Although WFC is not seeking international expansion, it is extending its reach in the domestic market in a variety of its business lines.

Wells Fargo & Co. (WFC) said it expects to earn about $3 billion in the first quarter, or 55 cents a share, sending another bold signal that the banking industry is regaining traction and sparking a stock rally throughout all sectors.

If Wells Fargo’s claim sticks, it’d be a 50% increase from the $2 billion income in the first quarter a year earlier. The second-largest U.S. home lender also projects $20 billion in total revenue and $372 million in dividends paid.

Net income was a record $3.05 billion, or 56 cents per diluted share, up from $2 billion, or 60 cents a share, a year earlier.

Wells Fargo’s revenue nearly doubled to $21 billion, a figure helped greatly by more than $100 billion originated in mortgages in the quarter.

With the December acquisition of Wachovia Corp., Wells Fargo upped its exposure to serving about one out of every three U.S. households. But it also brought a truckload of risky adjustable-rate home loans.

“In this terrible environment, to exceed on the upside is going to raise the bar pretty high,” Matt McCormick, portfolio manager and banking analyst at Bahl & Gaynor Investment Counsel, told Reuters. “Wells Fargo is clearly a dominant bank, one of the best operators out there.”

Wells Fargo’s peers Citigroup Inc. (C), JPMorgan Chase & Co. (JPM) and Bank of America Corp. (BAC) have also spoken optimistically about the financial industry and cited improved earnings from 2008.

Improving performance and optimistic forecasts lean heavily on an improving mortgage market. Record-low interest rates are fueling new home loans and mortgage refinancing.

Wells Fargo Chief Financial Officer Howard Atkins expects to pocket $100 billion in mortgage originations, and worked with 450,000 homeowners to either purchase a home or refinance their loan. The bank posted its strongest mortgage revenue in March, and Atkins believes the momentum will carrying into the company’s second quarter results.

With the mortgage crisis ripening, more and more financial institutions are shaken up. All company share prices are plummeting and more companies are willing to be taken over. On Nov 10, 2008, Wells Fargo raised $12.6B in stock offers in order to acquire Wachovia.

Wells Fargo's 80+ businesses offer a diversity in product and service offerings that most competitors cannot match. The diversification gives Wells Fargo opportunities to cross-sell products, or to refer one business' customers to other WFC businesses so that the one customer has multiple Wells Fargo products. Diversification across the financial services industry has also helped WFC protect against heavy losses in any particular business, for example, the current losses in the home mortgage and auto loan businesses.

WFC has seen strong double-digit growth in a number of its businesses, not just a few. This indicates that the company is not depending solely on strong performance by a couple "star" businesses, and is rather poised for stability, even when market conditions change.

Not seeking to expand internationally allows Wells Fargo to focus on competing in the U.S. market. Wells Fargo has been expanding in the Western United States. In 2006, WFC added nearly 4500 new employees and 109 regional banking stores.

Although profits fell slightly from 60 cents a share a year earlier because the bank sold upward of $12 billion in common stock to help fund its December purchase of Wachovia the 1st quarter of 2009 showed growth from Wachovia.

With Wachovia’s acquisition, Wells Fargo upped its exposure to serving almost one of every three U.S. households. But it also brought a truckload of risky adjustable-rate home loans. Wachovia topped all U.S. banks with $101.9 billion in losses and write-downs, Bloomberg reported.

However, Wells Fargo's net income increased by 52% in the first quarter mostly due its ownership of Wachovia.^[1] In the first quarter, 43.2% of WFC's non interest income and 40% of its net interest income came from Wachovia. These strong results show that the Wachovia acquisition will positively benefit Wells Fargo and will prove to be valuable.^[2]

For my money Wells Fargo's Chairman Richard Kovacevich had the best line about the current crisis when he said last year, "I'll never understand why bankers always seem to invent new ways to lose money when the old ones worked just fine".

Let's not forget Wells Fargo fought tooth and nail NOT to take TARP funds but was strong armed into it by then Treasury secretary Paulson. Now, those may say, "give it back". I am sure Wells will repay it as soon as they can but, if the gov't is giving all your competitors (JP Morgan (JPM), Citi (C), Bank of America (BAC))a financial boost, don't you risk losing some competitive advantage by declining it in an uncertain market? I believe you do.

This is especially true when you consider Paulson made it clear to Kovacevich that should he decline it then and then need it later, it would a most unpleasant transaction for shareholders. In the end, Wells took the money.

Time to sit back now and watch to see how the Wachovia merger is digested. There is too much uncertainty out there politically (both good and bad)to make a concrete decision.