Wells Fargo Expects $3 Billion Income in First Quarter, Fuels Stock Market Rally

By Mike Caggeso
Associate Editor
Money Morning

Wells Fargo & Co. (WFC) said it expects to earn about $3 billion in the first quarter, or 55 cents a share, sending another bold signal that the banking industry is regaining traction and sparking a stock rally throughout all sectors.

If Wells Fargo's claim sticks, it'd be a 50% increase from the $2 billion income in the first quarter a year earlier. The second-largest U.S. home lender also projects $20 billion in total revenue and $372 million in dividends paid.

Profit fell slightly from 60 cents a share a year earlier because the bank sold upward of $12 billion in common stock to help fund its December purchase of Wachovia Corp.

Investors cheered the news, sending the San Francisco-based bank's shares up 27% in morning trading. Wall Street reacted as well, with the S&P 500 up 2.7% at 1 p.m. today (Thursday). 

"In this terrible environment, to exceed on the upside is going to raise the bar pretty high," Matt McCormick, portfolio manager and banking analyst at Bahl & Gaynor Investment Counsel, told Reuters. "Wells Fargo is clearly a dominant bank, one of the best operators out there."

Wells Fargo's peers Citigroup Inc. (C), JPMorgan Chase & Co. (JPM) and Bank of America Corp. (BAC) have also spoken optimistically about the financial industry and cited improved earnings from 2008.

Improving performance and optimistic forecasts lean heavily on an improving mortgage market. Record-low interest rates are fueling new home loans and mortgage refinancing.

Wells Fargo Chief Financial Officer Howard Atkins expects to pocket $100 billion in mortgage originations, and worked with 450,000 homeowners to either purchase a home or refinance their loan. The bank posted its strongest mortgage revenue in March, and Atkins believes the momentum will carrying into the company's second quarter results.

With Wachovia's acquisition, Wells Fargo upped its exposure to serving almost one of every three U.S. households. But it also brought a truckload of risky adjustable-rate home loans. Wachovia topped all U.S. banks with $101.9 billion in losses and write-downs, Bloomberg reported.

Wells Fargo has performed well throughout the recession, but it hasn't been immune.

In the fourth quarter, it posted a downwardly revised $2.7 million loss, or 84 cents per share - its first quarterly loss in 18 years.

And not everyone is optimistic about the housing market's return. To be sure, there has been a plethora of good news - from rising sales of new and previous-owned home, rising mortgage applications, low mortgage rates and falling inventories.

However, an increase in delinquent mortgages, falling prices, and an 8.5% unemployment rate that's expected to top 10% before recovery efforts kick in.

"The market heals from the bottom up," National Association of Realtors spokesman Walter Molony told Reuters. "That's what provides liquidity to help people to sell their existing homes and to trade up and ultimately buy a bigger home or perhaps a new home."

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