Wells Fargo announced on Wednesday that it earned a record $3.17 billion profit in the second quarter. So why were its shares down 7 percent?
While Wells Fargo’s second-quarter profit may have beat analysts’ expectations, the market seemed to fixate on the bank’s potential problems in future quarters. The lender, whose largest shareholder is Warren Buffett’s Berkshire Hathaway, is still racking up losses on credit cards and mortgages, including the ones it acquired when it bought Wachovia.
The credit losses are forcing the bank to build larger loan-loss reserves and are hindering its ability to make new loans, which could hurt profitability down the road.
“The company’s nonperforming assets are up 50 percent sequentially, and their charge-offs are up by a third,” Richard X. Bove, a banking analyst at Rochdale Securities, told Dealbook when asked about Wednesday’s selloff in Wells Fargo’s stock. “Plus,” he added, “the mortgage number does not look sustainable.”
Wells Fargo’s total commercial real-estate losses jumped to $1.143 billion in the second quarter, up from $697 million from the prior quarter, representing 1.35 percent of total loans outstanding. Losses on first mortgages for one- to four-family houses ballooned to $758 million in the quarter, up from $391 million in previous quarter.
In total, the bank’s second-quarter net charge-offs were $4.4 billion, or 2.11 percent of average loans, compared with first quarter net charge-offs of $3.3 billion, or 1.54 percent of average loans.
The increased losses forced the bank to divert more precious capital to its loan-loss reserves. The company, which is based in San Francisco, built its reserves by $700 million for the quarter, bringing its allowance for credit losses to $23.5 billion, which is 2.86 percent of total loans.
The losses may also have contributed to Wells Fargo’s decision to tighten up lending in the quarter. The bank lent out $834 billion, down from the $856 billion it lent in the first quarter, when the markets were in far worse shape.While the bank says it doesn’t want to lend money irresponsibly, if it holds back on lending to creditworthy borrowers, then its future income stream could suffer.
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