McClatchy Newspapers, Published July 19 2011
Wells Fargo posts record quarter profit of $3.73 billion, topping Wall Street viewOAKLAND, Calif. — Wells Fargo & Co. reported record earnings Tuesday, but confronted by an erosion in revenue, the giant bank disclosed it has embarked on a cost-cutting push likely to eliminate jobs.
San Francisco-based Wells Fargo earned $3.73 billion in the second quarter, up almost 30 percent from the year-ago quarter. The bank's per-share profit was 70 cents, better than analysts’ expectations of 69 cents.
The bank's top executive, though, expressed concerns about the economy.
“The economic recovery continues to be slower than expected,” CEO John Stumpf said.
As a result, the bank told analysts during a conference call that it is pushing ahead with an initiative titled “Project Compass.” The bank hopes to reduce expenses by $1.5 billion, or 12 percent, by the end of 2012 through the effort.
“It makes a lot of sense to focus on cost reductions,” said Walter Mix, a director with Emeryville, Calif.-based Berkeley Research Group, a consulting and analysis firm.
That's because revenue has begun to slump at Wells.
The bank generated revenue of $20.39 billion in the second quarter, down 4.7 percent from a year ago.
“Wells Fargo is ahead of its peers in recognizing that expense control might be the only way to combat revenue weakness in the near term,” said Shannon Stemm, an analyst with Edward Jones.
In addition, the bank set aside $1 billion less in reserves to cover loan losses. That release contributed to the profit total. Wells has been releasing money from reserves since the second quarter of 2010.
“Our business fundamentals were strong with increased revenues, loans and deposits, lower operating costs, improved credit quality and higher capital levels,” Stumpf said.
Bank officials acknowledged that focusing on reducing expenses could lead to job cuts.
“We expect there will be some job reductions as a result,” said Holly Rockwood, a Wells Fargo spokeswoman. “But we don't have a staff reduction target.”
The bank has consolidated its automobile business and reorganized its wealth management operation. Wells also had eliminated jobs from its Wells Fargo Financial stores, had exited the reverse-mortgage business and announced the sale of H.D. Vest Financial Services.
Despite the fears over revenue, analysts embraced the overall quarterly results.
“The report looks great,” said Karen Dorway, president of Bauer Financial, a banking analysis firm. “It's encouraging to see improved profitability.”
The bank has so far dodged the obstacles presented by the dreadful economy in California.
“Wells Fargo has been very prudent in how it has managed its business, despite being in California,” said Michael Yoshikami, chief investment strategist with Walnut Creek, Calif.-based YCMNet, an investment firm. “They have done the best they possibly could to live with the reality of the real estate market.”
Distributed by McClatchy-Tribune Information Services.