Thursday, January 14, 2010

Wells Fargo & Co. (NYSE: WFC): Q4 Earnings Preview 2009

. Thursday, January 14, 2010

By Stock Wizard

Wells Fargo & Company (NYSE: WFC), the nation's fourth-largest bank, is scheduled to release financial results for the fourth quarter before the market open on Wednesday, January 20, 2010. Analysts, on average, expect the company to report net loss of 2 cents per share on revenue of $21.92 billion. In the year ago quarter, the company reported a loss of 79 cents per share on revenue of $9.82 billion.

Wells Fargo & Company, through its subsidiaries, provides retail, commercial, and corporate banking services principally in the United States. The company operates through three segments: Community Banking, Wholesale Banking, and Wells Fargo Financial.

In October, the financial services provider posted higher profit for the third quarter, thanks to its Wachovia acquistion that more than doubled revenues. The San Francisco, California-based company's net income applicable to common stock was $2.64 billion, compared to $1.64 billion in the prior-year quarter. On a per share basis, earnings grew 14% to $0.56 from $0.49 in the year-earlier period. Quarterly revenue totaled $22.5 billion, up from the previous year's revenue of $10.4 billion. Analysts, on average, expected the company to report earnings of $0.33 per share on revenue of $21.63 billion.

Provision for credit loss during the quarter increased to $6.11 billion from $2.49 billion reported in the comparable quarter of the previous year. Third quarter net loan charge-offs were $5.1 billion, compared to $1.9 billion in the corresponding quarter of the previous year. The allowance for credit losses, including the reserve for unfunded commitments, totaled $24.5 billion, higher than the previous year's allowance for credit losses of $8.03 billion.

The company expects credit costs to remain elevated in the fourth quarter, given the continuing economic challenges. However, based on portfolio trends and its current economic outlook, and assuming no unexpected further deterioration in the economy, the company believes consumer loan losses will peak in the first half of 2010 then gradually decline, while commercial and commercial real estate loan losses will peak in the second half of 2010 and then gradually decline. Further, Wells Fargo expects nonperforming assets or NPAs to continue to increase in the near term, but at a slower pace as credit deterioration slows. NPAs are expected to remain elevated through 2010.

Late in December, Wells Fargo & Co. (NYSE: WFC) repaid the $25 billion it received from the government in bailout money. The company sold 489.9 million shares of common stock at $25.00 per share for a total of $12.25 billion in a common stock offering completed December 18. Net proceeds of this common stock offering and excess liquidity were used to repay the $25 billion TARP investment and accrued dividends. The company said that, by repaying the TARP investment, it will eliminate $1.25 billion in future annual preferred stock dividends.

Wells Fargo's Tier 1 Common ratio, a key measure of financial strength, is 6.2% after TARP repayment and analysts believe it will continue to rise next year. However, Wells' Tier 1 ratio is below that of the other banks that have exited TARP. The Tier 1 ratio of Bank of America (NYSE: BAC) and Citigroup (NYSE: C) after TARP repayment stand at 8.5% and 9%, respectively. By fourth quarter 2010, Bernstein analyst John McDonald believes Wells Fargo will have a Tier 1 Common ratio of 7.9%, compared to Citi at 8.7% and Bank of America at 9.2%.

Although the share issuance will likely dilute earnings per share, experts believe that the step is mildly positive for the stock. In the immediate term, the TARP repayment will reduce the fourth-quarter earnings by $2 billion due one-time hit the bank will incur from repurchasing TARP preferred stock. Offsetting those concerns, however, analysts said their worries over Wells Fargo's balance sheet, TARP-related government interference into the business, and the size of its TARP repayment have been eased.

Among other developments, Wells Fargo said in December that it has agreed to buy Prudential Financial Inc.'s (NYSE: PRU) minority stake in their retail brokerage joint venture for $4.5 billion in cash.

The company's stock currently trades at a forward P/E (fye 31-Dec-10) of 26.71 and PEG ratio (5 yr expected) of 1.39. In terms of stock performance, Wells Fargo shares have gained nearly 21% since the beginning of the year.

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