(BN) Wells Fargo Says Bad Loans Rise in Second Quarter; Shares Drop

Wells Fargo Says Bad Loans Rise in Second Quarter; Shares Drop 2009-07-22 12:42:06.21 GMT By Ari Levy July 22 (Bloomberg) -- Wells Fargo & Co., the biggest U.S. home lender this year, said bad loans jumped in the second quarter as the recession made it harder for borrowers to keep up with payments. The shares dropped 5 percent in early trading. Assets no longer collecting interest climbed 45... [more]

Wells Fargo Says Bad Loans Rise in Second Quarter; Shares Drop 2009-07-22 12:42:06.21 GMT By Ari Levy July 22 (Bloomberg) -- Wells Fargo & Co., the biggest U.S. home lender this year, said bad loans jumped in the second quarter as the recession made it harder for borrowers to keep up with payments. The shares dropped 5 percent in early trading. Assets no longer collecting interest climbed 45 percent to $18.3 billion as of June 30 from the first quarter, the San Francisco-based bank said today in a statement. The increase was disclosed as Wells Fargo reported second-quarter net income soared 81 percent to a record $3.17 billion. Wells Fargo added to credit reserves amid a 26-year high in unemployment and rising commercial real estate delinquencies. While the acquisition of Wachovia Corp. in January bolstered deposits and home lending, the bank must stanch losses from defaults in California and a portfolio of option adjustable-rate mortgages, ranked among the riskiest loans issued during the housing boom. “We’re not out of the woods in terms of credit quality,” said Jennifer Thompson, an analyst at Portales Partners LLC in New York. She has a “hold” rating on Wells Fargo, because “with the company more exposed to some higher-risk markets, I’d rather wait for a better entry point,” Thompson said. The increase in bad assets was tied to Wachovia loans, the difficulty of liquidating holdings, the cost of loan modifications and the deterioration of commercial real estate, Wells Fargo said. Nonaccrual loans jumped $5.3 billion from March 31. Profit for the quarter equaled 57 cents per diluted share, compared with $1.75 billion, or 53 cents, a year earlier. Revenue almost doubled to $22.5 billion. Wells Fargo, whose biggest shareholder is Warren Buffett’s Berkshire Hathaway Inc., fell 17 cents to $25.35 a share yesterday on the New York Stock Exchange. The shares sold for $24.06 at 8:32 a.m. in early New York trading. TARP Repayment The bank said it generated $14.2 billion toward satisfying the Federal Reserve’s Supervisory Capital Assessment Program, surpassing the $13.7 billion requirement. The SCAP process will be completed at the end of the third quarter, Wells Fargo said. Wells Fargo is the last of the top four U.S. banks to post results. Bank of America Corp., the biggest U.S. lender, said last week that second quarter profit fell 5.5 percent on higher loan losses. JPMorgan Chase & Co., the second-largest U.S. bank reported its first profit increase since 2007 on record investment-banking fees. Citigroup Inc. had a loss, excluding a $6.7 billion gain from selling control of the Smith Barney brokerage unit, as consumer and business loan defaults rose. Of the four, only New York-based JPMorgan has repaid its bailout funds distributed by the Treasury last year. Wells Fargo said last month it will repay its $25 billion loan “at the earliest practical date.” Credit Reserves The lender probably won’t be able to pay back the funds within the next year to 18 months unless it raises more capital, wrote Sanford C. Bernstein & Co. analyst John McDonald, in a report this week. Wells Fargo added $700 million to build credit reserves, a decline from the first quarter’s $1.3 billion increase. The company incurred a $565 million special assessment fee from the Federal Deposit Insurance Corp. along with a merger-related and restructuring expense of $244 million. Mortgage originations in the U.S. surged 40 percent in the second quarter to $625 billion, according to estimates from Inside Mortgage Finance publisher Guy Cecala. Wells Fargo reported mortgage banking income of $3 billion in the quarter on $129 billion of originations. Market Share KBW Inc. analysts led by Frederick Cannon estimated in a July 1 report that Wells Fargo increased its market share for originations in the second quarter to 24 percent from 23 percent in the previous period. The bank expanded its lead over Bank of America among top U.S. home lenders in the first quarter with $100 billion of mortgages. The KBW analysts said they remain “cautious” on Wells Fargo shares because of “significant on- and off-balance sheet risks.” In California, unemployment hovered at a record 11.6 percent in June, compared with a nationwide average of 9.5 percent. Six of the state’s cities are among the 10 with the highest foreclosure rates in the U.S., according to RealtyTrac Inc., an Irvine, California-based company that keeps data on repossessed homes. “Credit quality is going to get worse,” said Thompson at Portales Partners. “The question is how much does it deteriorate and in what categories.” [less]