Friday, July 13, 2012

Wells Fargo's 2nd Quarter 2012 Results

Wells Fargo's (WFC) second quarter results that were reported this morning seemed just fine. One quarter will not answer all the questions that need to be answered for any investment, of course, but you can still get some useful clues.

The results pretty much reinforce what seem to be some of Wells Fargo's strengths.

Pre-tax pre-provision profit for the quarter was $ 8.9 billion in the latest quarter compared to $ 7.9 billion in the same quarter one year ago. That's an important number because it is an indication of what Wells can currently absorb in losses each quarter before putting a dent into equity capital.

Mortgage banking is strong with noninterest income from that activity rising to $ 2.9 billion in the second quarter of 2012 from $ 1.6 billion in the second quarter of 2011. Overall, noninterest income grew to ~ $ 10.2 billion in the second quarter of 2012 from $ 9.7 billion in the second quarter of 2011.

Net interest income grew to $ 11.0 billion in the quarter compared to $ 10.7 billion in the same quarter last year. Nothing spectacular but in this environment seems pretty solid. Their net interest margin remains exceptional among the larger banks at 3.91%. As I've said in other posts, this provides both an offensive and defensive advantage for Wells. Not only does this potentially increase average profitability and return on equity over the full business cycle, it should make the bank more durable when credit losses begin to really kick in during a recession. It seems built to withstand more than many others. Wells Fargo's quarterly earnings continues to benefit from the release of loan-loss reserves ($ 400 million pre-tax). Unsurprising in the context of where we are in the credit cycle, but not exactly a source of earnings that warrants any enthusiasm. The good news is Wells Fargo has been relying much less on the release of reserves than most peers. 

They also rely less on volatile investment banking and related activities. So there's far less dependence on opaque derivatives and trading gains in its mix. 

Core deposits grew to $ 882 billion at the end of the latest quarter from $ 809 billion in the same quarter one year ago. So that desirable source of funding continues to increase nicely.

Loans grew to $ 775 billion at the end of the latest quarter from $ 752 billion in the same quarter one year ago.

Provision for credit losses is down slightly but whether all-important credit quality is healthy can't be really understood in an economic environment like this. Unfortunately, if a bank drops the ball in this regard it's not usually obvious until after the fact.

As far as I'm concerned Wells Fargo has plenty of equity capital no matter how one decides to measure it.

Otherwise, I'm not going to judge whether they "beat expectations" because I can't say I really care what those expectation were in the first place.

I'm guessing whether they did a few pennies more or less per share this quarter isn't going to matter all that much in 10 or 15 years.

Adam

Long position in WFC established at much lower than recent prices
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