Wells Fargo Drops as Bove Questions Quality of Record Earnings

2009-10-21 20:32:39.385 GMT By Dakin Campbell and Nick BakerOct. 21 (Bloomberg) -- Wells Fargo & Co. dropped5.1 percent in New York trading after Rochdale Securities LLCanalyst Dick Bove cut the stock to “sell,” saying third-quarterprofit was “unsustainable” and included a swing in mortgageservicing fees that is “impossible to explain.”The bank, ranked fourth by assets in the U.S.,... [more]

2009-10-21 20:32:39.385 GMT By Dakin Campbell and Nick BakerOct. 21 (Bloomberg) -- Wells Fargo & Co. dropped5.1 percent in New York trading after Rochdale Securities LLCanalyst Dick Bove cut the stock to “sell,” saying third-quarterprofit was “unsustainable” and included a swing in mortgageservicing fees that is “impossible to explain.”The bank, ranked fourth by assets in the U.S., declined$1.56 to $28.90 in New York Stock Exchange composite trading,with most of the drop late in the session after Bove’s note wasdistributed. The bank reported a record quarterly profit beforethe market opened.Servicing fees on mortgages rose $1.1 billion, or 15 centsa share, and a lower tax rate gave a 2-cent boost, Bove said ina note to clients. Hedges tied to mortgage servicing rightsproduced a $3.6 billion gain, compared with a $1.3 billion lossin the second quarter, he wrote. The impact on earnings pershare was 68 cents, he said.“This is more money than the bank earned, overall,including the hedge profit, in the third quarter,” he wrote.“The remaining businesses of the bank were very mixed in thequarter. Most disturbing is that loan losses seem to beaccelerating on the negative side.”Wells Fargo, the largest U.S. home lender, posted a recordthird-quarter profit by limiting loan defaults and wringingcosts from Wachovia Corp. Net income almost doubled to $3.24billion, or 56 cents a diluted share, from $1.64 billion, or 49cents, a year earlier, Wells Fargo said today in a statement. Price Target Bove cut his rating from “neutral” and left his pricetarget for the stock at $25.The bank has been trying to quell doubts about potentiallosses on Wachovia’s home loans and the company’s concentrationin California, where home prices fell 17 percent in the 12months ended in August, according to the state’s Realtorsassociation. Consumer losses will top out in the first half andgradually decline for the rest of 2010, the bank predicted.“Charge-offs will continue to go up for the next couplequarters and I don’t think they’re provisioning correctly,”Paul Miller, a banking analyst at FBR Capital Markets inArlington, Virginia, said in an interview. “A lot of theheadline gain was related to the hedging of the mortgageservicing rights.” [less]