Why Wells Fargo Shares Are Down Today

Surely these are headline numbers to please the most despondent: During the third quarter, Wells Fargo (NYSE: WFC  ) generated record net income of $3.2 billion, doubling its year-ago figure. Earnings per share rose at a more modest 14% to $0.56 per share, but that was over 50% ahead of the analyst consensus estimate. Yet as I write this, Wells Fargo shares are off 5% today -- much worse than the modest declines in the KBW Bank Index and the S&P 500. What's going on here?

Looking forward through a rearview mirror
Third-quarter earnings are in the books, and the market is a discounting machine. Past earnings are only relevant to the stock price inasmuch as they contain information about future earnings. However, over the next six to 12 months (the time horizon of most hedge/mutual funds), the uncertainty affecting bank earnings remains high -- commercial real estate is still a big question mark, for example.

Furthermore, although the financial system has survived the crisis, the banking crisis is anything but over. As the table below demonstrates, the proportion of non-performing loans continues to rise; in fact, it rose faster at Wells Fargo than at Bank of America (NYSE: BAC  ) , JPMorgan Chase (NYSE: JPM  ) , or US Bancorp (NYSE: USB  ) (albeit from a lower base). Wells expects credit losses to peak in 2010.

Bank

Non-Performing Loans as a % of Total Loans Q3 2009

Non-Performing Loans as a % of Total Loans Q2 2009

Non-Performing Loans as a % of Total Loans Q1 2009

Wells Fargo (NYSE: WFC  )

2.6%

1.9%

1.2%

Bank of America (NYSE: BAC  )

3.5

3.1%

2.5%

Citigroup (NYSE: C  )

N/A

4.4%

4%

JPMorgan Chase (NYSE: JPM  )

2.7%

2.2%

1.6%

PNC Financial (NYSE: PNC  )

Reporting results tomorrow

2.4%

1.7%

US Bancorp (NYSE: USB  )

2.2%

2%

1.7%

Source: Capital IQ (a division of Standard & Poor's) and company documents.

Think long term; in the short term, expect volatility
Over the long term, the prospects for Wells Fargo are attractive -- I expect the Wachovia acquisition to pay off in spades. However, Wells shares -- along with its large bank peers -- have ridden the wave of exuberance that replaced the "great fear" of the first quarter. As investors come to terms with the ongoing costs of the banking crisis, valuations will come under greater scrutiny. As a result, I expect greater price volatility -- of the downward variety, that is -- over the next 12 months. Perhaps today's price action is just a foretaste of that phenomenon.

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Alex Dumortier, CFA, has a beneficial interest in Wells Fargo, but not in any of the other companies mentioned in this article. Try any of our Foolish newsletters today, free for 30 days. Motley Fool has a disclosure policy.


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  • Report this Comment On October 21, 2009, at 6:36 PM, TMFAleph1 wrote:

    Maybe the negative report from Dick Bove had something to do with the share decline, too ;-)

    On a more serious note, that report could well be a first catalyst for the market to take a closer, more sober (and sobering) look at the medium-term prospects of mega-cap banks and their valuations. As I write in the article, I do expect this phenomenon to take place.

    Alex Dumortier

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