The slump in the home loan sector, which is menacing to drag the economy into a recession and is predicted to cause more negative repercussions in the months ahead, did not spare Wells Fargo. In the third quarter, the company, which is the fifth largest bank in the U.S., netted its smallest profit growth in more than six years. The impact was also felt at U.S. Bancorp, which reported a 2% earnings decline. Last Tuesday, Wells Fargo stated that, despite the turmoil in the real estate market, it generated a $2.28 billion profit- which translates into 68 cents/share- during the three months ending in September.
The last time that the quarterly profit of this San Francisco-headquartered bank had increased by less than 5% was in the spring of 2001 when Wells Fargo posted an $87 million loss. The climate of jittery investment caused the company's share to recently shed $1.40 to close at $34.55. Nevertheless, RBC Capital Markets analyst Joe Morford highlighted that Wells Fargo "came out of the quarter bruised, but by no means broken".
Third-quarter earnings for U.S. Bancorp fell 67 cents/share or $1.18 billion, from 66 cents/share or $1.2 billion at the same time the previous year. U.S. Bancorp and Wells Fargo performed better than Citigroup Inc., the country's largest bank, which experienced a 57% decline in its third-quarter profit. Thus far, Wells Fargo seems to be coping better with stormy market conditions, and this can be attributed to its greater emphasis on basic business and consumer lending. The company focuses less on the more sophisticated hedging and home mortgage instruments that are currently destabilizing Citigroup and other economic lending powerhouses. Howard Atkins, Wells Fargo's chief financial officer, stated in an interview that the company is "doing remarkably well in a difficult environment". At the same time, the third quarter was a wake-up call.
As is the case with numerous other creditors, Wells Fargo is falling victim to the negative consequences flowing from 1) declining real estate values and 2) elevated adjustable interest rates that are taking a toll on cash-strapped debtors, who are already struggling to meet their monthly mortgage payment. "The housing sector is weak and we are not immune to that," explained Atkins. Due to turbulence in the home equity loan market, Wells Fargo marked down, during the quarter, its mortgages' value by $490 million.
Minneapolis-based U.S. Bancorp reported that it was predominantly the troubles in the mortgage, home refinance, and home-building sectors that led its provision for bad loans to soar 50 percent to $199 million. As for Wells Fargo, its pesky problems concern loans extended to borrowers and which transformed their residences into private piggy banks when the United States witnessed a steady rise in property values from 2000 to 2005.
In the third quarter, Wells Fargo suffered losses totaling $153 million on home equity loans. This is an increase greater than fivefold, since at the same time last year, losses amounted to $27 million. The company cautioned that its losses in the home equity loan sector would likely continue to increase in the present quarter and stay at "elevated levels" in 2008. By the end of September, Wells Fargo had, on its books, home equity loans worth approximately $83 billion. The lending institution held an additional $67 billion in loans taken out to purchase the real estate, or first mortgages. As concerning first mortgages, Wells Fargo's third quarter's losses were only $16 million. Confirming borrowers' worrisome predicament are the delinquent payments-at least 90 days late- on loans issued by Wells Fargo and valued at $1.26 billion. This is a $177 million or 16% increase from the end of June.