April 22, 2010 3:00 am

Wells Fargo still struggling with bad loans

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Wells Fargo's first-quarter earnings fell 16 per cent as the bank continued to struggle with souring loans to home owners and real estate developers, but provisions to cover future defaults declined along with early-stage delinquencies in signs it has "turned the corner" on credit.

The San Francisco-based bank earned $2.5bn, or 45 cents a share, in the first quarter, compared with $3bn, or 56 cents a share, a year earlier.

"We've turned the corner on many of the credit challenges of the past two years," said John Stumpf, chairman and chief executive. But he cautioned that demand for new loans remained lacklustre. "While the economy is regaining its footing, it has yet to deliver a broad-based recovery," he said.

Mr Stumpf's comments echoed those made recently by other bank executives, who pointed to improving credit trends as a sign that the worst of the financial bubble had deflated.

Standard & Poor's upgraded its coverage of regional banks from neutral to positive yesterday. "We see credit quality improving at a significant pace and [2010] earnings benefiting from much lower loan-loss provisioning expenses than we previously expected," Erik Oja, analyst, wrote in a research note to clients.

Wells Fargo's provisions to cover bad loans totalled $5.3bn in the period, up from $4.6bn a year earlier, but down from $5.9bn at the end of the fourth quarter. The bank said early-stage delinquencies improved across all major loan portfolios, including home equity, car dealer services and credit cards. Net charge-offs declined $83m to $5.3bn.

"We believe charge-offs peaked in the fourth quarter - earlier than we thought," Howard Atkins, chief financial officer, said.

Wells Fargo continued its efforts to modify the mortgages of troubled home owners. It said some 523,336 trial modifications had been completed since January 2009 and pointed out that it signed up to a government plan to modify second-lien loans, which is expected to ramp up later this year.

The first quarter included $247m of integration costs related to the bank's 2008 acquisition of Wachovia, which Mr Stumpf said was exceeding his expectations "culturally and financially".

Unlike Wall Street firms that reported strong results this week, Wells Fargo does not have a large investment banking operation to shield it from the downturn in consumer and commercial lending.

Other regional banks have also reported declines in loan-loss provisions and improvements in credit quality, signals that the economy is improving even in hard-hit areas such as the south-east.

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