Analysts Weigh In On Wells Fargo (WFC) Following Better-Than-Expected Results

This morning, mega-bank Wells Fargo (NYSE: WFC) reported better-than-expected second quarter EPS on record net income and revenue. Depsite the upside, shares are 3% lower on a sell-the-news reaction and ongoing concerns over credit.

Wells Fargo reported Q2 EPS of $0.57, versus the analyst estimate of $0.34. Revenue for the quarter was $22.51 billion, up 28% from last year and versus the consensus of $20.49 billion. Wells showed a credit reserve build of $700 million, bringing allowance for credit losses to $23.5 billion, 2.86% of total loans and 1.5 times nonperforming loans.

Today, a few of analysts so far have weighed in on the stock. Here is what some of them have to say:

FBR Capital We continue to recommend that investors remain cautious on WFC as credit costs continue to increase at an alarming rate and this quarter's strong mortgage banking revenues should slow down in the second half of the year.... we don't expect any stabilization in credit costs for any financial company until the unemployment rate peaks sometime in 2010... The credit picture will likely jump to the forefront today as NCOs increased 35% or $1.1B to $4.4B, and NPAs increased 45% or $5.7B to $18.3B. The NPA increase is an acceleration from 1Q09, when non-performers jumped 40% or $3.6B. Given the big increase in NPAs and NCOs, we believe that WFC is under-provisioning for furture losses as the company only built reserves by roughly $700M, a much smaller build than the $1.3B build in 1Q09. Currently, WFC's allowance for loan losses to quarterly NCOs equals 5.4 quarters, down from a 6.9 quarter coverage ratio in 1Q09. Unless WFC's net charge-offs stablize over the next few quarters, WFC will have to start materially increasing its provision expense, which will put pressure on earnings and valuations. Maintains Underperform rating.

Goldman Sachs Against the credit performance, the primary concern is NPAs up 45% on a linked quarter which is among the highest rates of growth of any bank we cover and much higher than the 15-20% growth seen at most other big banks such as BAC, USB etc... Headline EPS is higher than consensus, but we think the market had already priced in an EPS beat so in reality reported EPS is a little lower than investors hoped... The stress test capital requirement has been a concern as Wells needed $13.7bn and only raised by $8.5bn but Wells stated that it has beat the Fed earnings forecast by more than $5bn and thus does not need another capital raise for the stress test. Repaying TARP is a separate issue and that may require a raise. Maintains Neutral rating.

Standard & Poor's Ratings Services (Credit) ...WFC turned in another quarter of what we see as strong earnings in view of the weak economy and the continued sharp deterioration in its loan portfolio... The loan portfolio suffered, suffering a sharp 50% increase in nonaccruals, especially at Wachovia, which is starting from a low base of nonaccruals after acquisition-related markdowns. Nonaccrual loans were still a moderate 1.9% of loans. Adjustments to loss assumptions on pick-a-pay mortgages--mortgages on which the borrower chooses the amount of payment--were slight. Asset quality remains an important factor in our negative outlook on the rating. Maintains Credit Rating

Fitch Ratings WFC faces continued significant pressure on asset quality in light of the extremely weak economic environment. The ratings also consider WFC's above average earnings capacity, derived primarily from its diverse community and mortgage banking activities, which has allowed WFC to provide for elevated loan losses and simultaneously build the reserve against future
losses. Downgraded the long-term Issuer Default Ratings of Wells Fargo & Company and subsidiaries to 'AA-' from 'AA'. Removed from Rating Watch Negative. Outlook Stable.

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