Wells Fargo Predicts Huge Loss in Fourth Quarter : Banking: Though large, the estimate of up to $240 million in red ink is not the cataclysmic amount some had feared. As a result, the company’s stock surges.
Wells Fargo & Co., the nation’s 10th-largest banking company, said Thursday that it expects to lose as much as $240 million in the fourth quarter, largely because of California’s worsening commercial real estate market.
The San Francisco-based bank also said that to conserve capital it is slashing in half the dividend it pays shareholders. It will also allocate about $700 million for possible losses on loans, many of them related to real estate.
Although Thursday’s disclosure--which had been anxiously awaited in the industry--is a clear reminder of California’s deep economic woes, it was not the cataclysmic event some doomsayers had predicted.
As a result, many investors, fearing an even bigger loss, reacted by bidding Wells Fargo’s stock up $3.25 to $60.50. Stock prices for other California banks jumped as well.
“What it says is that California is not Texas . . . yet,” said Stephen Berman, a banking analyst with County Natwest Securities.
More than any other California bank, Wells Fargo is viewed as a bellwether. Its operations are concentrated in California, and it has the most exposure to the state’s real estate market. In addition, it is widely viewed as the banking industry’s best real estate lender, and until now had remained relatively unscathed by the real estate downturn.
Thursday’s announcement came as regulators with the Office of the Comptroller of the Currency are wrapping up a special review of Wells Fargo’s real estate portfolio. The regulatory examination had been the subject of extraordinary rumor and speculation, with bank analysts widely split over the company’s condition.
Although the results were worse than a number of bank analysts had predicted, many expressed relief that the loss was not reminiscent of the disastrous losses that pummeled New England and Texas banks in recent years.
“I think the main thing you are seeing in the market is relief at knowing what it is and that it isn’t higher than it is,” said Lisa Todaro, senior banking analyst at SNL Securities in Charlottesville, Va.
Wells Fargo Chief Financial Officer Rodney L. Jacobs said investors responded favorably after witnessing what he described as “a clear test of the strength of the franchise.” Even with the fourth-quarter results, Jacobs noted, Wells Fargo will still post a small profit for 1991. Wells Fargo earned $252 million in the first nine months of 1991, down from $555 million a year earlier.
Even still, some bank analysts cautioned that it is too early to sound an “all-clear” signal that Wells Fargo’s problems are over.
That a quarterly bank loss exceeding $200 million can be considered good news says a lot about the anxiety nationwide over California’s anemic economy, its overbuilt commercial real estate market and the health of loans made by the state’s largest banks.
In its brief announcement, Wells Fargo said it is boosting the total amount allocated for possible loan losses to $1.65 billion. That accompanies a net $200-million charge-off for bad loans, an action that occurs when a bank writes off loans it no longer expects borrowers to repay.
In a statement, Chief Executive Carl E. Reichardt said that increasing the funds covering loan losses is prudent because Wells Fargo is “operating in a difficult environment full of pessimism and anxiety about the economy in general and real estate in particular.”
Wells said its estimated net loss for the quarter will be from $4.20 to $4.60 a share, or $220 million to $240 million. The bank also slashed its quarterly dividend to 50 cents a share from $1.
Regulators have been pressuring a number of major banks to take steps to conserve capital, but Jacobs said the decision to slash the dividend, as well as boost the reserves, was recommended by Wells Fargo’s management to its directors.
Should Wells Fargo weather the next few quarters successfully and California’s economy slows its decline, analysts believe that the bank will be poised for an aggressive expansion. Reichardt, the bank’s acquisition-minded leader, has made no secret in the past that he is interested in a possible merger with Los Angeles-based First Interstate Bancorp.
But most banking analysts are skeptical that anything meaningful will happen for a while. Wells would first have to be assured that its own problems are behind it, that all of First Interstate’s problems have been identified and that the economy will improve. Meanwhile, First Interstate’s executives, who have shown little interest recently in mergers, are busy slashing costs and organizing their collection of banks to run more efficiently.
Short-sellers, who bet that stocks will fall in price, have been targeting Wells Fargo for three years. Some were undaunted by Thursday’s results. Michael Murphy, whose Overpriced Stock Service has in the past gone so far as to predict the bank’s failure, said he interprets the results as an indication that Wells Fargo won the latest hard-fought round with regulators.
But other analysts said they doubt that the battle was as intense as has been rumored.
