Wells Fargo Profit Falls as Credit Weighs

Wells Fargo, whose planned purchase of Wachovia Corp will create the largest U.S. retail branch banking network, said on Wednesday third-quarter profit fell 25 percent, hurt by higher credit losses and investment write-downs.

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Net income dropped to $1.64 billion, or 49 cents per share, from $2.17 billion, or 64 cents, a year earlier, the fourth straight quarterly decline.

Revenue rose 5 percent to $10.38 billion, while expenses fell 3 percent.

Analysts on average expected a profit of 34 cents per share on revenue of $11.08 billion, according to Reuters Estimates.

San Francisco-based Wells Fargo [WFC 32.06 -1.84 (-5.43%) ] was able to wrest Wachovia from the arms of Citigroup [C 14.88 -1.02 (-6.42%) ] with a $15.1 billion all-stock takeover, largely because it never dove deeply into the risky mortgages and exotic debt that strangled Wachovia and rivals such as Washington Mutual, Countrywide Financial and IndyMac.

The merger has won federal regulatory approval and is expected to close this quarter. It would create the nation's fourth-largest bank, with more than $1.4 trillion of assets, close to $800 billion of deposits, about 6,600 branches, 48 million customers and 280,000 employees.

In buying Wachovia, Wells Fargo is expanding east of the Mississippi River, a big change for a lender known for a stagecoach that evokes 19th century westward migration. Wells Fargo said it saw a "tremendous inflow" of deposits late in the third quarter as nervous depositors fled rivals.

"We're known and admired for our conservative financial position and a disciplined acquisition strategy that will not change," Chief Executive John Stumpf said in a statement.

Wachovia, based in Charlotte, North Carolina, was pummeled by a $122 billion adjustable-rate mortgage portfolio it took on when it bought California lender Golden West Financial Corp in October 2006.

Wells Fargo expects new federal tax deductions to cushion a $74 billion write-down tied to Wachovia's lending.

Shares of Wells Fargo rose 3.6 percent to $34.74 in pre-market trading.

Home Equity Losses Elevated

In the third quarter, Wells Fargo added $500 million to loan loss reserves, or 10 cents per share, largely for expected increases in credit losses in several consumer businesses.

The bank set aside $2.5 billion for credit losses, while net charge-offs more than doubled to $2 billion.

Chief Credit Officer Mike Loughlin said home equity loan losses will be "higher than normal" until home prices stabilize.

Results also included $646 million of charges for exposure to Fannie Mae and Freddie Mac preferred stock and Lehman Brothers [LEHMQ 0.07 -0.01 (-12.5%) ] bankruptcy.

Profit rose 10 percent to $1.59 billion from retail banking, and fell 86 percent to $83 million in wholesale business banking.

Wells Fargo Financial, which lends to less credit-worthy people, had a $33 million loss. Net interest margin was 4.79 percent, compared with the second quarter's 4.92 percent and 4.55 percent a year earlier.

Adding Wachovia would allow Wells Fargo's branch network to surpass those of Bank of America [BAC 23.24 -1.01 (-4.16%) ] and JPMorgan Chase [JPM 39.33 -1.16 (-2.86%) ].

Wells Fargo would trail Citigroup, JPMorgan and Bank of America in assets, though the latter will regain the top spot when it buys Merrill Lynch [MER 18.15 -0.20 (-1.09%) ].

Billionaire Warren Buffett's Berkshire Hathaway [BRK 119800.0 6650.00 (+5.88%) ] is Wells Fargo's largest investor, owning 8.8 percent of its stock on June 30, Thomson ShareWatch said.

Wells Fargo shares closed Tuesday at $33.52 on the New York Stock Exchange. They have risen 11 percent this year, compared with a 30 percent drop in the KBW Bank Index.

Copyright 2008 Reuters.

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