Wells Fargo & Co. posted a record third-quarter profit by limiting loan defaults and wringing costs from Wachovia Corp.
The quarter included gains from hedging, leading analysts to question whether the profit would continue, and the stock dropped 5.1%. Net income almost doubled to $3.24 billion, or 56 cents a share, from $1.64 billion, or 49 cents, a year earlier, the San Francisco bank said.
Wells Fargo has been trying to quell doubts about potential losses on Wachovia's home loans and the company's concentration in California, where home prices fell 17% in the 12 months that ended in August. Consumer losses will top out in the first half and gradually decline for the rest of 2010, the company predicted.
The bank's shares declined $1.56 to $28.90, with most of the drop late in the session after Rochdale Securities analyst Dick Bove cut the stock to "sell" from "neutral." Bove's note to clients cited a $1.5-billion gain from hedges tied to home-loan collection contracts, known as mortgage servicing rights.
Hedges produced a $3.6-billion gain, compared with a $1.3-billion loss in the second quarter, Bove wrote. The effect on earnings per share was 68 cents, a swing he said was "impossible to explain," and he called the profit "unsustainable."
Last year's takeover of Wachovia is adding to earnings and the costs are "significantly less" than earlier forecasts, Chief Executive John Stumpf said. With mortgage rates near record lows, originations are up 36% in the first 10 business days of the current quarter, according to the bank, which predicted credit losses would peak in 2010.
Nonperforming loans and write-offs grew more slowly, the bank said.