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Diverse Services Give Wells Fargo a Boost

Profit is up 9% despite a difficult banking environment caused by higher interest rates.

July 19, 2006|E. Scott Reckard | Times Staff Writer

Wells Fargo & Co. said Tuesday that its second-quarter profit rose 9% despite higher interest rates and a rise in consumer loan delinquencies, as the banking giant continued to hone a strategy of selling its customers multiple financial products and services.

The San Francisco-based company, the nation's fifth-largest bank and the biggest bank headquartered in California, reported net income of $2.09 billion, or $1.23 a share, up from $1.91 billion, or $1.12, a year earlier.

Revenue was $8.79 billion, up 12%.

The Federal Reserve's two-year-old campaign of raising short-term interest rates has squeezed many banks, narrowing the difference between what they earn on loans and what they pay for deposits.

But Wells Fargo's results show that it is weathering an increasingly tough banking environment by persuading consumers and businesses to use more of its services, and by adjusting its mix of assets, analysts said.

For example, Wells Fargo said fees from credit and debit cards were up 16% in the quarter compared with a year earlier.

The bank's chief financial officer, Howard Atkins, said 34% of the households doing business with Wells Fargo had a credit card with the bank as of June 30, up from 32% a year earlier. Usage of cards was higher as well, he said, with purchase volume on credit cards up 23% from a year earlier.

The company's non-interest income -- principally fees it charges customers -- totaled $3.8 billion in the quarter, a jump of 14% from the second quarter of 2005.

Wells Fargo, the nation's second-largest mortgage lender, also did a robust business in home loans in the quarter, even though the real estate market overall slowed. The bank's mortgage originations were up 36% from a year earlier, to $116 billion in the period.

Analyst Gary Townsend of Friedman Billings Ramsey & Co. described the mortgage originations as "very strong," saying Wells Fargo appeared to be picking up market share in a declining market by undercutting the terms offered by smaller competitors.

"They do have a very strong origination network, so they can choose the markets where they'll be more aggressive," he said.

Wells Fargo also is the nation's No. 2 mortgage servicer -- sending bills and collecting payments for loans made by itself and other lenders.

The company's community banking division, which includes mortgage lending, contributed the most to net income in the quarter, reporting profit of $1.34 billion, up 8% from a year earlier.

Wells Fargo, with $500 billion in total assets, saw an increase in troubled loans. The percentage of total consumer loans, including mortgages, classified as seriously delinquent or in default was 0.5% at the end of the second quarter, up from 0.29% a year earlier, the bank said.

But analysts say any figure under 1% is considered healthy.

Noting that Wells Fargo does 40% of its business in California, Townsend said the bank benefited from the state's strong economy in the quarter.

It also did a good job controlling costs, with revenue increasing faster than expenses, said Townsend, who reaffirmed his "outperform" rating on Wells Fargo stock.

Wells Fargo's net interest margin -- the difference between interest earnings and interest expense -- edged down from 4.85% in the first quarter to 4.76% in the second.

But that was much better than the average for comparable "super-regional" banks, which was 3.75% in the first quarter and was expected to go lower, Townsend said.

Wells Fargo's shares fell 30 cents to $68.25 on Tuesday, but they are up nearly 9% year to date. By contrast, the blue-chip Standard & Poor's 500 index is down 0.9%.

The company's second-quarter results included a one-time $250-million loss on the sale of lower-yielding mortgages and debt securities -- divestitures the company said would improve earnings over the long term.

Separately, one of Wells Fargo's banking rivals in the West, Minneapolis-based U.S. Bancorp, reported that its second-quarter earnings rose 7%, to $1.2 billion, or 66 cents a share, from $1.12 billion, or 60 cents.

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