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Wells Fargo (NYSE:WFC) appears set to continue banking on its ability to use earnings to meet the Federal Reserve’s capital buffer requirements, industry sources told dealReporter.
The San Francisco-based regional bank is rumored to be preparing to report second-quarter earnings well above market expectations. A Wells Fargo spokesperson declined to comment.
Equity analysts’ consensus second quarter estimates call for Wells to report core earnings about USD .32 a share on July 22. Fox-Pitt Kelton Cochran’s Andrew Marquardt has projected core earnings of USD .59 a share, among the more bullish Street estimates.
Even so, some industry sources cautioned the bank may still have to raise capital through either an equity raise or preferred share exchange in the third quarter. Industry bankers noted high earnings might pop Wells’ stock, allowing the bank to raise equity at less dilutive levels.
Wells Fargo’s large commercial and residential mortgage portfolios inherited from Wachovia are expected to continue to weaken in the coming quarters, which may lead to higher than expected losses, industry bankers said. One banker who knew of the second-quarter earnings rumors said he was skeptical the bank will be able to continue reporting high earnings given the Wachovia book.
This news service reported in February that Citigroup (NYSE:C) estimated Wachovia’s loan portfolio would lose about USD 30bn more than Wells Fargo projected when the two bidders looked at the troubled North Carolina regional bank last fall. Since then Wells has remain confident about its projections.
Wells Fargo’ announced strategy for increasing its capital buffer is unique among the 19 stress-tested banks since almost all other institutions ordered to raise capital have done so exclusively through equity raises, asset sales or exchanging preferred shares for common shares. At least two other stress-tested banks considered plans similar to Wells’, but instead opted for less-risky capital raising options, a source who worked with the banks said.
When Wells announced a USD 8.6bn common equity raise in May, executives said regulators told the bank if its pre-provision net revenue exceeds Federal Reserve forecasts, it can count the excess towards the USD 13.7bn in capital regulators ordered the bank to raise. Wells reported USD 9bn PPNR in the first quarter, about USD 2bn over regulators’ forecast, executives said.
“Instead of raising the whole [USD 13.7bn], Wells is saying, ‘we’re not going to,’ it’s basically a stand off against the government, which in my mind is a perfectly legitimate thing,” a capital markets strategist said.
“I think they feel it will be tough for the government to resist them if by the end of the year they have had another two or three solid quarters and they’ve banked that capital. What can the government do?” a second industry banker added.
The Fed told banks that submitted capital plans in June to not count more than 5% of forecasted earnings to meet the capital buffer requirements. However, it is also understood the Fed has agreed with banks to recognize posted earnings above the projected PPNR levels generated by the stress tests, inline with the comments made by Wells executives. Banks have until November to raise capital.
Wells reported strong first-quarter results thanks to its strong mortgage banking business and a USD 4.4bn gain from reduced markets as a result of a more lenient FASB ruling, Sterne Agee analyst Adam Barkstrom said.
Barkstrom said he expects Wells to book one-time gains where possible in the second and third quarters to bolster earnings. Sterne Agee predicts Wells will report USD 1.32 a share earnings during all of 2009, which is inline with other analysts’ estimates.
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