Banks Expect to Swing to a Profit

By Zachary A. Goldfarb
Washington Post Staff Writer
Friday, April 10, 2009

Wells Fargo, the fourth-largest U.S. bank, said yesterday that it expected to earn $3 billion in the first three months of the year, its highest quarterly profit ever, generating investor hopes that the battered banking sector will show improvement next week when the nation's biggest banks start reporting earnings.

The report, which came ahead of the bank's official financial filing set for April 22, followed upbeat comments in recent weeks by Bank of America, J.P. Morgan Chase and Citigroup. Shares of banking companies jumped sharply yesterday; Wells Fargo rose 32 percent, to $19.61.

Banking stocks have rebounded far from their lows, which some analysts say is a reflection that banks are turning a corner as a result of the massive federal bailout programs, significant restructuring and layoffs, and an economy showing signs of stabilizing.

Bank stocks have "stopped discounting an end-of-the-world scenario," said Nancy Bush, an independent banking analyst based in New Jersey.

But many analysts cautioned that the industry still faces significant hurdles. Results of government stress tests to determine whether the largest 19 banks will need more federal money are expected in coming weeks. There's debate about how quickly and effectively a new federal program to relieve banks of troubled assets will work. And several prominent analysts have warned that banks face big losses on loans.

"The value of assets basically depends on borrowers being able to make payments on their homes," said Jakub W. Jurek, an assistant professor of economics at Princeton University. "It's difficult to believe that has improved with the increasing unemployment rate."

Wells Fargo, which has received $25 billion from the federal government, said that its traditional and investment banking businesses grew and that the results in its mortgage business were "exceptionally strong."

The company said it put $4.6 billion away to cover losses, less than many analysts expected. It also said Wachovia, a large Charlotte bank that Wells Fargo bought last fall, was contributing more in sales and profit than expected to the combined company's bottom line.

As a result, the company said its earnings would be more than twice what a consensus of analysts surveyed by Bloomberg had anticipated.

But some analysts were skeptical of the unexpectedly big boost in earnings. Analysts at Arlington investment bank FBR Capital Markets asked in a research report yesterday whether Wells Fargo benefited from recent changes in mark-to-market accounting rules. Banks now can value troubled assets at a higher price than the market is willing to pay. A spokeswoman for Wells Fargo declined to say.

The FBR analysts also doubted that Wells Fargo was accurately assessing its losses on loans. "We believe that credit quality materially deteriorated in the first quarter and that Wells Fargo is under-reserving for expected future losses," the analysts wrote.

Christopher Whalen, managing director of Institutional Risk Analytics, questioned how Wells Fargo could have a slower rate of defaults, or charge-offs, this year than last, given the worsening state of the economy.

"I just don't think that, where we are in the credit cycle, it's credible for a bank with their portfolio composition to tell me their charge-off rate fell," he said.

In the coming weeks, other major banks will report earnings, including J.P. Morgan Chase on Thursday, Citigroup next Friday and Bank of America on April 20. The banks or their chief executives have all said in recent weeks that they'd made a profit in the first few months of this year, after tens of billions of dollars in losses last year.

And their stocks also rose yesterday -- J.P. Morgan rose 19 percent, to $32.75; Citigroup rose 13 percent, to $3.04; and Bank of America rose 35 percent, to $9.55.

The U.S. government has invested $239 billion in banks since October and pledged hundreds of billions of dollars more to absorb losses and help the economy.

In a report that rattled the markets earlier this week, prominent banking analyst Mike Mayo wrote that total loan losses "should increase to levels that exceed the Great Depression" by late 2010. Mayo also was skeptical that government programs would help as much as hoped.

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