Wells Fargo Post Declines in Profits, Trigger a Rally

Banks Thanked For News Short Of Disastrous
J.P. Morgan, Wells Fargo Post Declines in Profits -- And Trigger a Rally

By ROBIN SIDEL
April 17, 2008; Page C1

Investors sometimes get excited by bad news just because it isn't as bad as it could have been.
Wednesday's profit slide at J.P. Morgan Chase & Co. and Wells Fargo & Co. triggered a rally by beleaguered bank stocks. Earnings reports and comments by top executives of the two big U.S. banks included a slew of troubles -- more souring mortgages, write-downs of toxic securities and economic gloom -- but no particularly nasty new surprises for shareholders who have been pummeled by the credit crunch since summer.

It was almost as if Wachovia Corp. hadn't rattled Wall Street two days earlier by slashing its dividend and getting a $7 billion cash infusion to plug its leaky balance sheet -- or as if the rocky bank-earnings season didn't have a long way to go, including Citigroup Inc.'s results Friday.

The forecast for the banking industry has left investors feeling like they are on a seesaw, up one day and down the next. That isn't likely to end anytime soon, judging from the sobering words that came from J.P. Morgan and Wells Fargo yesterday, even as their stock prices were rising.

"Obviously, the worse a recession gets, the worse it gets for us," said James Dimon, chairman and chief executive at J.P. Morgan, the second-largest U.S. bank in stock-market value behind Bank of America Corp. After being hit hard in recent months by rising delinquencies in its $95 billion home-equity portfolio, J.P. Morgan warned its prime-mortgage business is experiencing higher charge-offs as more borrowers fail to repay their loans.

Howard Atkins, Wells Fargo's chief financial officer, said the "prudent assumption is that we haven't hit bottom yet and that things will remain weak in the near term." Loan charge-offs at the fourth-largest U.S. bank, based in San Francisco, were higher in the latest quarter than some analysts had expected.

MORE ON EARNINGS

• Earnings Slump at J.P. Morgan
• Wells Fargo's Net Declines 11%
• Cheat Sheets: Merrill, Citi, BofA

Overall, J.P. Morgan reported a 50% plunge in net income, which fell to $2.37 billion, or 68 cents a share, from $4.79 billion, or $1.34 a share, a year earlier. The latest results included $1.5 billion in pretax proceeds from last month's initial public offering of Visa Inc. J.P. Morgan's revenue fell 11% to $16.89 billion.

At Wells Fargo, first-quarter net income fell 11% to $2 billion, or 60 cents a share, from $2.24 billion, or 66 cents a share, a year earlier. The bank got a Visa-related gain of $334 million gain. Revenue rose 12% to $10.56 billion.

Many analysts and investors were generally soothed by the fact that two of the strongest U.S. banks haven't been knocked to their knees by the industry's worst nightmare since the S&L crisis. Both J.P. Morgan and Wells Fargo remain well-capitalized and profitable, especially when compared against rivals such as Citigroup, Washington Mutual Inc. and Wachovia that are spilling red ink and have needed injections of capital.

Amid the turmoil, executives at J.P. Morgan and Wells Fargo stressed their relative strength is helping them steal market share from weakened competitors. They also vowed to continue investing in their businesses -- from retail branches to mortgages -- while some competitors are retreating. Both banks reiterated their interest in acquisitions under certain conditions.

With yesterday's share-price gains, J.P. Morgan and Wells Fargo are in positive territory so far in 2008. In comparison, Citigroup has tumbled 20%, while Bank of America is down about 8%.
J.P. Morgan's "write-downs were manageable," said David Hendler, an analyst at New York research firm CreditSights, "but credit quality remains a moving target."

The New York bank took its biggest credit crunch-related hits since the housing bubble burst, including $2.6 billion in write-downs on leveraged loans and mortgage-related investments. J.P. Morgan also set aside $2.5 billion to cover soured loans across the company.

Nearly all of J.P. Morgan's diverse business reported declines, with some posting losses for the latest quarter. J.P. Morgan's investment bank, one of the bank's largest units, lost $87 million in the first quarter, down from record net income of $1.5 billion a year earlier.

"We were obviously faced with challenging conditions across the first quarter," said Michael Cavanagh, J.P. Morgan's chief financial officer.

The glass-half-full mood that many investors were feeling Wednesday could be put to the test when Citigroup reports first-quarter results Friday. The New York financial conglomerate is expected to post another whopping loss as it struggles with the fallout from the credit crisis and the weak U.S. economy.