Banking on Golden State : Wells Fargo Gains Spark Investor Surge in California
Wall Street rushed into California bank and S&L; stocks on Tuesday, after Wells Fargo & Co.’s fourth-quarter earnings report suggested that a Texas-like economic crash is not in the cards for the Golden State.
San Francisco-based Wells, long considered the major bank most vulnerable to California’s deep slump, stunned analysts with news of a drop in problem assets to $2.65 billion at year’s end, from $2.94 billion on Sept. 30. The company also said it earned $58 million in the quarter, contrasted with a huge loss a year earlier.
Wells’ stock surged $13 to an all-time high of $99 on the New York Stock Exchange, and pulled virtually every other California bank and S&L; stock higher as well: BankAmerica, for example, leaped $3.875 to $53.375, Coast Savings jumped $1.50 to $13.50, and Great Western Financial rose $1.125 to $19.
Though Wells’ chief executive, Carl E. Reichardt, cautioned that “the California economy, particularly that of Southern California, continues to decline, and we remain cautious,” many investors apparently saw the earnings report as a powerful sign that the worst of the bad-loan situation is behind the state’s lenders.
There were, naturally, some dissenters Tuesday. George Salem, a bank analyst at Prudential Securities in New York and a longtime Wells detractor, argued that focusing on one quarter’s numbers is absurd.
“Yes, I’m very surprised” that Wells’ bad loans dropped, Salem admitted. But he still believes that California is in the grips of a horrendous structural economic shift that will financially devastate many more firms and individuals, along with their lenders.
“There are always ‘sucker rallies’ in situations like this,” Salem says. “There is always disbelief that structural change is occurring.”
Other analysts, however, said investors’ optimism over the Wells report--and the stock feeding frenzy it set off--made sense for two key reasons:
* Throughout California’s 2 1/2-year-old slide, Wells’ heavy dependence on in-state borrowers in general--and commercial real estate borrowers in particular--has made it a bellwether of California investment angst. So the bulls figure that a turn for the better at Wells offers at least some hope that the state’s woes are near to bottoming.
Even if 1993 isn’t a great year for California’s economy, the bank bulls’ logic is that Wells and many of its peers worked hard to identify potential problem loans early in the state’s recession and have already begun a workout process for those borrowers--or have simply charged off the loans. Indeed, Wells wrote off a total of $798 million in loans last year, or 2% of its total loans, versus $572 million in 1991.
* Wells’ report merely reinforced the improving picture described by some other California lenders. Last week, for example, City National Bank also reported a drop in problem loans. And Tuesday, First Interstate Bancorp said its drop in problem loans last year “far exceeded earlier expectations.”
Today, H. F. Ahmanson, parent of Home Savings, is expected to report its fourth-quarter earnings, “and I think they will most likely confirm (Wells’) view,” says Jonathan Gray, analyst at Sanford C. Bernstein & Co. in New York.
There also was another force behind Tuesday’s rally: Many investors remember that they stayed away from troubled New England bank and S&L; stocks for too long, missing the surge in those shares last year--which occurred long before there were concrete signs that the worst of those lenders’ losses were past. So trigger fingers are itchy on Wall Street.
“Investors have made the same mistake in every region--assuming that the regional economy has to get better, or that the real estate market has to get better, before bank earnings can get better,” says Thomas K. Brown, analyst at DLJ Securities.
In fact, many banks and S&Ls; nationwide have engineered dramatic earnings recoveries without much help from the economy. The key has been the sharp drop in short-term interest rates over the last two years, which has allowed many lenders to slash deposit rates, thus lowering their cost of doing business and cushioning loan losses.
Still, some analysts warn that buying California bank and S&L; stocks today is a high-risk venture.
For one, there is the chance that Prudential’s Salem will yet be right--that California is entering a long structural decline, like Texas in the 1980s, that will wipe out many more financial players.
Charles T. Meeks, a former Texas banker now with Alex Sheshunoff Management Services in Austin, notes that “several times in the ‘80s the bankers of Texas said, ‘Let’s clear it all up, charge it all off and get back to the business of banking.’
“But then the problems started right up again, because real estate values can drop much further than you ever thought,” Meeks says. Losses on home mortgages in particular tend to be the last shoe to drop, he warns, because people try to hold on to their homes as long as they can. That could bode ill for many of California’s S&Ls.;
Secondly, even if you buy the idea of a California recovery, realize that the stocks of many banks and S&Ls; have already rocketed to prices that assume better earnings, says Campbell Chaney, analyst at John Hancock Institutional Equity Services.
Many New England bank stocks were selling for less than half book value a year ago, before they rallied, Chaney says. In contrast, most California banks and S&L; stocks are well above book, he says.
“The California (stocks) are already where the New England banks are in terms of valuation,” Chaney says, “so I don’t see the upside potential that you saw in New England.”
New Gold Rush?
California bank and S&L; stocks surged on Tuesday after Wells Fargo reported better than expected earnings. But analysts note that most of the stocks have already moved up significantly in recent months.
52-week Tues. close Stock high/low and change Ahmanson 22 1/8-13 20 1/2, + 7/8 BankAmerica 54 1/8-38 53 3/8, +3 7/8 Calfed 4 3/4-1 1/4 3 1/4, + 5/8 City National 16-4 5/8 10 1/4, + 7/8 Coast Savings 14-6 13 1/2, +1 1/2 Downey Savings 18 1/4-11 1/2 17 3/4, + 7/8 First Interstate 52 3/8-30 3/8 52, +2 1/8 Firstfed Finl. 26 1/8-13 1/2 24, +1 3/8 Glenfed 8 1/2-1 3 1/2, + 5/8 Great Western 20-12 1/2 19, +1 1/8 Imperial Bancorp 15 1/2-6 5/8 13 1/4, + 3/8 Union Bank 31 3/4-19 31 3/4, +1 1/4 Wells Fargo 100 1/4-61 1/4 99, +13
All stocks trade on NYSE except Union Bank and Imperial (NASDAQ).
Wells’ Stock Rockets
Shares of banking giant Wells Fargo soared $13 to $99 on Tuesday after it reported a sharp drop in troubled loans--suggesting that California’s real estate woes could be bottoming.
Wells Fargo biweekly closes, NYSE:
(except latest)
Tuesday: $99.00
