Wells Fargo’s record profit sparks hint of hope for economy
NEW YORK – Are banks back?
No big bank was supposed to utter the words “record” and “profit” in the same sentence this year. But Wells Fargo said Thursday it earned about $3 billion for the first quarter – its highest income ever, and twice what analysts predicted.
The unexpected peek into the bank’s official results, which will be released in two weeks, was a welcome sign of improvement in one of the most troubled and critical industries in the U.S. economy.
Money is cheap and mortgage applications are surging, thanks in large part to unprecedented efforts in Washington to breathe life back into the financial industry. The government has been pumping money into the financial system, slashing interest rates, and buying and guaranteeing more types of assets than ever before. As a result, cash poured into Wells Fargo & Co. and loans streamed out, indicating a strong pickup in the most important source of business for any bank.
Other banks across the country are likely benefiting, too, from near-zero borrowing costs and a rebound in the mortgage lending business. If more banks report that these advantages are offsetting loan losses, the stock market’s yearlong panic over the fate of the banking industry should alleviate.
“The mind-set is: The banks cannot do well,” said Richard Bove, banking analyst at Rochdale Securities. “But the banks are in a stronger position than anyone expected.”
Wells Fargo’s surprise profit is also another good indicator for the overall economy. Stocks soared on the news Thursday – not just banks, but also technology, homebuilding and transportation companies. That’s because if banks are stable, more loans can be made. And when people can borrow, they can spend.
It’s important to remember, though, that the San Francisco-based company has been among the heartiest of the big banks throughout the financial crisis. Because it did not get as risky in its investments or as loose in its lending standards, loan losses at Wells Fargo are lower than at many of its peers.
Most analysts are still predicting quarterly losses for banks like Citigroup Inc. and Morgan Stanley, which also release their results later this month. They will likely be weighed down by the souring debt and exotic credit products on their books that have gotten into trouble.
“Banks are not all going to show the same type of robust earnings that Wells did,” Bove said. “Loan losses are going to go up. That’s a definite for the industry.”
Wells Fargo’s own chief financial officer even warned against getting too excited about the results.
“It’s premature to conclude the economy has turned,” said CFO Howard Atkins in an interview.
Atkins did say the bank was seeing a clear benefit from the government’s actions to bring interest rates down. “All I can tell you is, we’re seeing a lot of business.”
Here’s a closer look at the drivers behind Wells Fargo’s record profit:
Cash for a bargain. Think a 4.8 percent interest rate for a 30-year mortgage is good? Try 0.2 percent – that’s what banks are paying to borrow from one another through the Federal Reserve.
Where it might have cost a bank $4 in interest for every $100 it borrowed a year ago, it now costs less than $1 to borrow the same amount of money. Banks’ borrowing costs have fallen more than consumer borrowing costs have (especially when you consider credit card rates, which are largely rising).
Still, much of the reduced cost of borrowing is being passed on to consumers to help generate new business.
More mortgage applications. During the quarter, Wells Fargo extended over $100 billion in mortgage loans after applications soared 64 percent from the final quarter of 2008. A huge amount of the applications came in during March, suggesting the growth will carry over into the second quarter.
While about three-quarters of Wells Fargo’s mortgage activity was customers refinancing loans to lock in better rates, about a quarter came from new home purchases. Homebuying activity is now about the strongest it’s been since the housing market collapsed in 2007, Atkins said.
Wells Fargo makes more money by making new loans than refinancing because it means new interest income. But refinancing does bring in fees.
Banks flush with cash. Wells Fargo was one of hundreds of banks given federal funding last fall to spur lending. The Treasury Department gave the bank $25 billion.
Most relatively healthy banks have also been able to attract more deposits as customers worry about other banks collapsing, or pull money out of riskier investments like stocks to avoid losses. Wells Fargo didn’t provide details about first-quarter deposit growth, but said consumer and small business checking accounts were growing.
Loan losses were low. Dubiously low, to some analysts. Wells Fargo said it wrote off $3.3 billion of its loans as unrecoverable in the first quarter. That’s down sharply from the combined $6.1 billion in write-offs Wells Fargo and Wachovia reported in the fourth quarter.
Paul Miller, bank analyst at the investment bank Friedman Billings Ramsey, projected Wells Fargo’s first-quarter write-offs would total $4.9 billion. These kinds of charges are widely expected to be the biggest problem for banks this year.
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