In another quarter of record-setting profits, Wells Fargo & Co.'s earnings report Tuesday bested analysts' expectations and reversed course on several issues that soured the mood three months ago.
The San Francisco-based bank increased its loans and its deposits and made more money in mortgage banking than the quarter before.
Now, CEO John Stumpf said his bank is on the lookout for acquisitions, such as new loan portfolios, to add customers.
"They're capitalizing on the weakness of some of their competitors," said Nancy Bush, banking-industry analyst and contributing editor to SNL Financial. "This is what happens when you're the one-eyed man in the land of the blind."
Wells Fargo slightly beat analysts' consensus estimate with earnings of 73 cents per share, and it narrowly edged out the quarter before with $3.9 billion in net earnings attributable to common shareholders. Earnings were up 20 percent over the same time period last year.
Wells Fargo also reversed the two main issues that troubled investors last quarter. Revenue, a trouble spot then, was up about 5 percent, to $20.6 billion. Wells also improved its net interest margin - the difference between what the bank earns on its investments and what it pays to borrow - by five basis points from the prior quarter.
Still, full-year revenue of $80.9 billion was down 5 percent from the year before.
Another negative: The bank's expenses crept up 7 percent quarter-to-quarter despite a companywide focus on cutting costs. However, executives stuck by their commitment to shrink the bank's quarterly cost base by about $1.5 billion by the end of 2012. The bank's cost-cutting initiative will result in job losses, but Wells Fargo does not have a specified number.
The quarter's results were in stark contrast to those posted Tuesday by rival Citigroup Inc., which reported that its fourth-quarter earnings attributable to shareholders fell 12 percent to $1.1 billion amid weak capital market activity. JPMorgan Chase & Co., which released earnings last week, reported that its fourth-quarter profit shrank 23 percent from the year before.
"We think it is quite possible that (Wells Fargo) has set the high water mark for the rest of group," analysts with investment firm Stifel Nicolaus wrote in a research note Tuesday. Wells Fargo does not have a comparable investment banking presence to its peers, instead focusing more on consumer banking.
For the full year 2011, Wells Fargo earned $15 billion attributable to shareholders, up 29 percent from the year before and another record. It increased the average number of products a customer household has from 5.7 to 5.92.
"I'm extremely pleased with Wells Fargo's performance in 2011 - including strong deposit and loan growth, record cross-sell and record earnings," Stumpf said in a news release.
Wells Fargo shares closed up about 0.7 percent at $29.83.
In the market to acquire
Charlotte-based Bank of America Corp., which reports earnings Thursday, has focused on shrinking its balance sheet, selling off lines of business and portfolios.
With a stronger capital position, Wells Fargo is moving in the opposite direction. That ability, analysts say, gives the bank a tremendous competitive advantage over its peers.
"We are kicking lots of tires. We are in a unique position in that we are not capital constrained," Stumpf said in a conference call with analysts, noting that his bank will take a cautious approach. "If all we get out of this is sore toes, that's OK with us. ... We're not going to do these things unless they're good economically for us."
In the past few months, Wells Fargo has announced the acquisition of several loan portfolios, primarily from troubled European banks looking to raise capital. In December, the bank said it had agreed to buy $1 billion in asset-based loans from a Bank of Ireland subsidiary. The month before, Wells Fargo announced a deal with the Irish Bank Resolution Corporation.
Near the 10 percent cap
Bush said a big banking deal is very unlikely, because Wells Fargo, like most big banks, is bumping up against the deposit cap: Under federal law, no bank can exceed 10 percent of the nation's deposits through an acquisition.
Wells will probably continue to focus on asset-based or commercial real estate portfolios, particularly those from European banks involving U.S. clients.
"They're good portfolios that they can manage. They have good returns," said analyst Marty Mosby of financial services firm Guggenheim Securities.
Wells also said its strong capital and liquidity puts it in a good position going into the federally mandated stress tests and capital plan review.
The bank has submitted its capital plan to the Federal Reserve, with a response due by March 15. While not willing to discuss details, Stumpf said Wells' plan is focused on returning more capital to shareholders. That could come in the form of another dividend increase or more stock buybacks. In 2011, Wells increased its dividend to 12 cents per share quarterly, up from 5 cents.
The bank also repurchased about 26.6 million common shares in the fourth quarter and has a contract to buy back 5.6 million shares.
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