If you’re a bank reporting a multibillion-dollar loss, it’s great timing to do so just as Wall Street starts to believe the government may take troubled assets off your books.
Shares of Wells Fargo & Co. jumped 31% on Wednesday even though it posted a fourth-quarter loss of $2.55 billion, or 79 cents a share, on huge provisions for bad loans.
On a day dominated by hopes that a government-created “bad bank” might swallow the industry’s toxic loans and securities, Wells also impressed Wall Street by maintaining its quarterly dividend of 34 cents a share and saying it didn’t need another capital infusion from the government.
Wells received a $25-billion investment from the Treasury last fall. Rivals Bank of America Corp. and Citigroup Inc., which initially received the same amount, have since gotten an additional $20 billion each -- and were required by the government to cut their quarterly dividends to a penny as a result.
Wells said its deposits rose during the quarter at an annualized rate of 31% as customers spooked by troubles at other banks transferred funds.
Its loss compared with a profit of $1.36 billion, or 41 cents a share, in the fourth quarter of 2007. For the full year, Wells Fargo earned $2.84 billion, or 75 cents a share, down 35% from $8.06 billion, or $2.38 a share, in 2007.
The San Francisco bank’s shares surged $5 to $21.19.
The results included a $294-million write-off of loans that had been secured by customers’ investments with money manager Bernard Madoff, who was accused last month of running a $50-billion Ponzi scheme. The bank said it had no direct involvement with Madoff.
The fourth-quarter loss, Wells’ first since 2001, stemmed from a decision to boost reserves for loan losses by a total of $8.4 billion, which analysts at Keefe, Bruyette & Woods called prudent protection against the deteriorating economy.
Wells’ takeover of Wachovia Corp., the troubled Charlotte, N.C., banking giant, closed Dec. 31. Wachovia separately reported a loss of $11 billion for the quarter.
Some analysts had feared that Wells’ previous estimates of losses in Wachovia’s loan portfolios, particularly on adjustable-rate mortgages inherited in Wachovia’s takeover of Golden West Financial Corp., might have been too low.
But Wells said that it was “comfortable in the aggregate with original credit assumptions” and that it was sticking by its projections for savings and growth in earnings from the takeover. The company said it had “de-risked” a portfolio of $93.9 billion in especially troubled Wachovia assets, writing down their value by $37.2 billion.
The biggest component of the portfolio was $55.8 billion in soured adjustable-rate mortgages -- loans that allowed a borrower to pay so little each month that the loan balance rose.
No one knows how a government bad bank would value soured assets from banks. But having aggressively marked down its own bad loans as well as Wachovia’s, Wells might be able to sell such assets without recording large additional losses, said Bart Narter, an analyst for Boston research firm Celent.
“They might even book a gain” by selling marked-down holdings, Narter said.
The analysts at Keefe Bruyette said Wells’ biggest problem was a low level of so-called tangible common equity, one measure of a bank’s capital cushion against losses. Keefe Bruyette calculated Wells’ tangible common equity at 2.63% of its assets Dec. 31. Most analysts, they said, would like to see a ratio of at least 5%.