Wells Fargo profit drops but dividend, stock rise

Wells Fargo & Co. gave anxious investors a pleasant surprise Wednesday, reporting a profit drop that was milder than anticipated and lifting its quarterly dividend by 10%.

Wells Fargo’s second-quarter profit fell 22% as more customers at the nation’s fifth-largest bank failed to pay back their loans. But it raised its dividend to 34 cents from 31 cents -- at a time when many other financial institutions are slashing theirs to preserve capital.

The San Francisco-based company’s shares soared $6.72, or 32.8%, to $27.23 on Wednesday after tumbling alongside other financial stocks over the last several days on worries about more U.S. mortgage losses and bank failures.

Wells Fargo has now logged three straight quarters of profit declines. But the bank has been weathering one of the nation’s worst credit crises much better than most of its competitors, in part because it had less exposure to the subprime mortgages whose failure undermined the financial sector. That means it hasn’t been forced to take the huge number of write-downs that other banks have absorbed.

“This is the first fairly positive data point that we’ve had for the banking industry -- we haven’t seen any really strong results in the first half,” said Byron MacLeod of Gradient Analytics. “This is where you’re going to begin to see some stratification between those that are conservatively positioned and those that aren’t.”

Wells Fargo earned $1.75 billion, or 53 cents a share, in the April to June period, down from $2.28 billion, or 67 cents, a year earlier. Revenue soared 16% to a record $11.5 billion on strength in the bank’s deposits, mortgage banking, credit card and wealth management businesses.

Analysts polled by Thomson Financial had predicted, on average, a profit of 50 cents a share on revenue of $10.65 billion.

The bank took a provision for credit losses of $3 billion. That provision included total charge-offs of $1.5 billion and an increase in reserves for future losses of $1.5 billion. Wells Fargo’s total allowance for credit losses now stands at $7.52 billion, up from $6.01 billion at the end of the first quarter.

Although Wells Fargo’s results appeared to cheer up its shareholders Wednesday, the bank is not exactly coasting.

Wells Fargo still has about $8.4 billion in home equity loans, which executives expect to keep posting losses until home prices stabilize. Meanwhile, charge-offs for credit cards and small-business loans increased, although Howard Atkins, Wells Fargo’s chief financial officer, attributed the losses to “growth and seasoning” of those portfolios.