Thursday, January 21, 2010

Wells Fargo optimistic on economy

NEW YORK - Wells Fargo says the economy is getting better: It sees signs of recovery in its loan business.

But the big bank may be more of an exception than a leading indicator.

Breaking from the cautious, even downbeat forecasts of rivals like JPMorgan Chase & Co., Wells Fargo on Wednesday used words like "favorable" and "confidence" about its future amid tentative signs that its loan defaults are close to a peak or have peaked. The company believes the recession-weary consumer could be making a comeback.

The company is way ahead of other banks, although the CEO of Bank of America, which lost more than $5 billion last quarter, expressed mild optimism that sagging consumer sentiment may be turning around.

Many banking analysts aren't so sure. The reason: Ongoing problems including the deteriorating commercial real-estate market and rising credit-card defaults could still trip up a recovery.

So while Mike Loughlin, Wells Fargo & Co.'s chief credit and risk officer, said a better economic outlook and an improved credit forecast "increase our confidence that our credit cycle is turning," that assessment might be premature, if not for Wells Fargo, then for the banking industry as a whole.

Bert Ely, a banking analyst in Alexandria, Va., called Wells Fargo's performance a "good surprise" but said several potential pitfalls could upend the bank's bold statements about a potential recovery. Specifically, yet-to-be-realized losses on commercial real estate, prime mortgages and credit cards could weigh on all bank earnings well into 2010.

"We still have a lot of problems on the horizon," Ely said. "We're certainly past the abyss, but some banks went deeper into it than others and face a steeper climb out."

Wells Fargo said it earned $394 million, or 8 cents per share, during the fourth quarter. That surprised analysts polled by Thomson Reuters who were expecting a loss of 1 cent per share.

Adam Barkstrom, a managing director at Sterne Agee, shared the skepticism over Wells Fargo's forecast of an economic recovery, saying: "I think it's still too early to make that prediction."

He said the bank is still highly exposed to risky mortgage markets in Florida and California. It has also restructured many troubled mortgages, which could mean the bank is "just kicking the can down the road" if those borrowers

still can't pay their bills.

Moreover, Wells Fargo has aggressively written down bad loans made before the downturn while at the same time tightening lending standards, boosting the quality of its credit portfolio compared with its competitors, said Jamie Peters, senior equity analyst at Morningstar. That means other banks that haven't acted as aggressively could still be facing credit problems.

Other analysts aren't so pessimistic.

Gerard Cassidy, banking analyst at RBC Capital Markets, said Wells Fargo's earnings report could signal that a credit turnaround is in the offing. He said losses from failed loans historically peak six months after the end of a recession, which means lending could pick up again in the second quarter of this year.

Given Wells Fargo's surprise profit, "it seems to us that there's ample evidence that banks' credit problems will be peaking shortly," he said.

Bank of America, meanwhile, said it lost $5.2 billion after payment of preferred dividends, an amount that reflects the costs of repaying government bailout funds as well as continuing losses from loans. The bank's Merrill Lynch investment-banking operations helped offset the lending losses. JPMorgan Chase and Citigroup also reported that their investment-banking businesses helped to mitigate the impact of their troubled loans.

Bank of America's loss, which translated to 60 cents per share, was larger than the 52 cents analysts expected.

All four big consumer banks that have reported fourth-quarter earnings made hefty additions to the money they set aside to cover bad loans. Wells Fargo added $5.91 billion during the fourth quarter, while Bank of America set aside $10.1 billion. Citigroup said Tuesday that it had boosted its reserves by $8.18 billion, and on Friday, JPMorgan Chase said that it had added $7.28 billion to its reserves.

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