After Devouring First Interstate, Wells Experiences Some Indigestion
Wells Fargo & Co. is having more trouble digesting First Interstate Bancorp than Wells--and Wall Street--had expected.
Wells on Tuesday reported first-quarter earnings of $339 million, or $3.62 a share, well below the mean estimate of $3.75 from analysts surveyed by earnings tracker IBES Inc.
The San Francisco-based banking giant said it is halfway through the massive cost-cutting program it promised investors after swallowing rival First Interstate one year ago.
But that cost-cutting isn’t helping Wells with its customer base. In fact, just the opposite: Too many customers are walking away, and the loss of business is hurting the bank’s earnings prospects.
“Due to runoff in our loan and deposit portfolios, we are not where we would like to be with respect to revenue,” Chairman Paul Hazen admitted in the company’s earnings release.
The report sent Wells’ stock down $6.875 to $257.875 on the New York Stock Exchange on Tuesday, leaving it nearly 20% below its all-time high of $320.50 set in March.
That is a far deeper pullback than most bank stocks have suffered over the past month, as interest rates have risen and the stock market in general has tanked.
From the start, Wells faced a monumental task in merging Los Angeles-based First Interstate’s operations into its own, in part because First Interstate wasn’t a willing bride: Wells won the bank in a bitter takeover battle with Minneapolis-based First Bank System, First Interstate management’s preferred suitor. So Wells’ victory didn’t exactly make for elated First Interstate employees.
Moreover, to achieve the $800 million in annual cost savings that it promised Wall Street, Wells has been closing many First Interstate branches, a process that naturally leads to customer disruptions and attrition.
The problem is that Wells is behind its own schedule in stemming that attrition and--most important--in generating new business from its much larger asset base.
Wells said its loans totaled $65.4 billion at March 31, down 3% from Dec. 31. The bank’s core deposits dropped 7% in the period, to $76.2 billion at March 31. Total assets fell 6% to $101.9 billion.
“It’s a tall order to do a large deal like this and ramp up a marketing effort” to bring in new customers, said Thomas Theurkauf, analyst at Keefe, Bruyette & Woods Inc. in New York.
Not surprisingly, some of Wells’ competitors are crowing. Some have been extremely aggressive in trying to lure Wells-First Interstate customers away from the bank, and they have capitalized on some Wells computer snafus and other merger-related problems that have caused customers aggravation.
Glendale Federal Bank, perhaps the most aggressive competitor in terms of advertising aimed specifically at stealing Wells accounts, claims that 75% of the new retail and business accounts it has picked up since summer have come from Wells.
A Wells spokeswoman admits that the bank has “lost more customers than we expected” post-merger, but she said some of the decline in loans and deposits was by design, as Wells has de-emphasized some areas of First Interstate’s business.
From investors’ point of view, the big issue is whether Wells faces such an uphill fight to restore revenue growth that the spectacular earnings gains that had been expected over the next few years are mere pipe dreams.
Merrill Lynch analyst Sandra Flannigan on Tuesday cut her 1997 earnings estimate for Wells to $15.00 a share from $16.50, and her 1998 estimate to $18.40 from $20.00. She also downgraded the stock to “neutral” near-term.
Wells will hold a conference call with analysts this morning, and the question of how CEO Hazen plans to fire up revenue growth will be the main focus, analysts say.
“They’ve been saying for quite a long time that they expected revenues to decline with the First Interstate integration, and trough in the first quarter,” said Carole Berger, analyst at Salomon Bros. “But the real question is, can they turn it around in the [current] quarter and the third quarter?”
On the plus side for Wells, the California economy, and the western U.S. economy in general, continue to improve, which means there are more loans to be made and more businesses to serve--if Wells can get in front of rivals.
Also, Wells doesn’t appear to be developing any significant credit problems. It charged off $201 million in bad loans in the first quarter, about half of which were credit-card related. And although Wells’ credit-card losses have been above industry averages recently, the first-quarter card charge-off was about flat with the fourth-quarter’s.
Investors will also be happy to see that the bank continues to make good on its premerger promise to continue to buy back stock. Average shares outstanding in the first quarter totaled 90.8 million, down 2% from the fourth quarter.
Given Wells management’s track record--the bank is considered to be one of the country’s best-run--analysts are understandably reluctant to suggest that the merger-related problems are anything but temporary.
“Don’t underestimate these guys,” Theurkauf said.
But even at a relatively depressed price of $258, Wells’ stock sells for 15 times analysts’ mean 1997 earnings estimate. That’s a higher price-to-earnings ratio than most bank stocks enjoy. Wall Street has long judged Wells to be worth a premium, but if the revenue picture doesn’t improve soon, that premium is likely to deflate further.
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Sinking Stocks
Bank stocks have pulled back more sharply than the average blue-chip stock in recent weeks, and Wells Fargo’s shares have led the banks’ retreat.
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52-week Tues. Pctg. Stock high close change J.P. Morgan $109.88 $97.25 --11.5% City National 25.38 22.13 --12.8% Mellon Bank 86.25 74.75 --13.3% NationsBank 65.00 56.00 --13.8% Glendale Federal 28.13 24.25 --13.8% BankAmerica 123.75 106.13 --14.2% First Bank System 84.50 72.25 --14.5% Citicorp 127.13 106.88 --15.9% BancOne 49.25 41.38 --16.0% Wells Fargo 320.50 257.88 --19.5% S&P; 500 index 816.29 754.72 --7.5%
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Source: Bloomberg News
