Wells Fargo has handed the banking sector an Easter treat. The San Francisco-based firm has given an early glimpse of its first-quarter results – and reckons it cranked out a bumper $3bn profit. That adds weight to several banks’ claims that the year started off well, and even dangles the prospect that the banking crisis is over – though calling that has so far been a painful and futile exercise. But even if it is, the worst recession in decades isn’t – and that will bring banks more pain.
There are certainly encouraging signs in Wells’ results. Its mortgage unit performed well, with $100bn of new loans and a 41% increase in pending new business. That bodes well for Bank of America, Citigroup and JPMorgan and helped Wells record a profit despite another $8bn or so of charge-offs and writedowns.
But Wells has some built-in advantages over some of its peers. For starters, buying Wachovia allowed it to front-load $37bn in writedowns. Also, in recent years Wells has enjoyed a whopping net interest margin of just under 5%, two percentage points more than its peers, including Wachovia. Even diluted by its new acquisition, Wells' NIM was 4.1% last quarter. Low borrowing costs and highish lending rates might bump up others’ lending margins this quarter, but Wells’ looks more sustainable.
What’s more, Wells’ capital markets businesses, most of which it inherited from Wachovia, is small by comparison to its big three rivals – and indications from the likes of JPMorgan boss Jamie Dimon are that March was not a great month on Wall Street and could drag down the performance of banks heavily involved in trading and capital-raising.
Even Wells isn’t out of the woods yet: it still has a large mortgage portfolio which is at risk if unemployment keeps rising. And the biggest unknown is what ensues after the US government completes its stress tests of the country's 19 largest banks. If the outcome is to impose higher capital ratios, Wells’ first-quarter showing might not be enough – its ratio of tangible common equity to tangible assets is now only just above 3%, widely viewed as the appropriate threshold.
But turning such a large profit in the middle of a recession should provide some comfort to investors. If nothing else, it should get them thinking that the financial sector may not all be doom and gloom.