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Below, please find an udpate to the work published on WFC. See the Doo Doo 32 Drill Down and the Forensic Analysis for a background of my viewpoints on this company.
Wells Fargo & Company – Q2 2008
Income statement analysis
In 2Q2008, Wells Fargo revenues increased 16% to $11,429 mn from $9,981 mn in 2Q2007 off 21% increase in net interest income and 10% increase in non-interest income. The banks net interest income increased 21% to $6,278 mn as a result of 33% decline in interest expense to $2,269 mn. The banks interest income remained nearly flat at $8,547 mn in 2Q2008 compared with $8,573 mn in 2Q2007. Overall the banks net interest margin improved 23 basis points reaching 4.92% in 2Q2008 as a result of decline in funding cost as a result of high proportion of checking and transaction accounts in their core deposit mix. Banks non-interest income increased 10% y-o-y to $ 5,181 mn primarily off higher fees from mortgage banking partially offset by higher losses on debt securities and reduction in net gains from equity investments. However Wells Fargo revenues after provisions declined 8% as a result of 318% increase in provision for credit losses to $3,012 mn in 2Q2008, up from $720 mn in 2Q2007 signaling continued deterioration in the credit quality of the banks loan portfolio.Wells Fargo’s non-interest expense increased by a nominal 2% to $5,860 mn in 2Q2008 due to increased salary (6%), occupancy cost (8%) and other expenses (6%) partially offset by decline in incentive compensation (10%) and operating lease (31%). As a result of increased revenue growth the banks efficiency ratio improved 51.1% in 2Q2008 from 57.9% in 2Q2007. Overall the banks net income declined 23% to $1,753 mn or (0.53 per share) in 2Q2008 compared with $2,279 (or 0.67 per share) in 2Q2007 as mounting provisions continued to create pressure on earnings.
Credit metrics
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Wells Fargo credit metrics continued to deteriorate in all aspects as seen from the table above. In 2Q2008, 90 days loans past due (an indicator of future charge-off and delinquency) increased 9.1% q-o-q and 63.9% y-o-y. Loans past due 90 days and non-performing assets represented a significant 3.7% and 10.9% of shareholder’s equity at the end of 2Q2008, rising alarming questions about the magnitude of potential impact relating to worsening credit situation. As a result of rising charge-off, Wells Fargo had increased its provisions to $3.0 bn (0.77% of average loans) in 2Q2008 compared to 0.7 bn (0.22% of average loans). Wells Fargo had changed its off policy from 120 days to 180 days for its home equity portfolio enabling it to defer $265 mn charge-off in 2Q2008. However despite this change in charge-off policy, net charge-off increased to 1.55% of average loans in 2Q2008 compared to 0.87% in 2Q2007.
