Fueled by double-digit revenue growth in seven of its business segments, including auto financing, Wells Fargo & Co. reported its third straight quarter of record earnings last week despite mounting loan losses and decreases in its mortgage originations.
The nation’s fourth largest bank reported a $2.64 billion third-quarter profit, nearly double what it reported for the year-ago period. Revenue stood at $22.5 billion, which was flat with its record second-quarter revenue.
Loan losses climbed to $5.1 billion from $4.4 billion in the second quarter, but executives offered a positive outlook going forward.
“We are two years into the most difficult credit cycle in recent memory,” said Howard Atkins, chief executive officer. “Economic challenges continue and we expect that credit costs will remain elevated in the fourth quarter.
“However, based on portfolio trends and our current economic outlook, and assuming no unexpected further deterioration in the economy, we believe consumer loan losses will peak in the first half of 2010 then gradually decline.”
In the third quarter, the San Francisco-based bank reported double-digit revenue increases from the previous quarter in asset management, auto lending, consumer finance, debit cards, retirement services, Small Business Administration lending and wealth management.
As for the company’s auto finance business, the segment was able to gain market share in both the new- and used-car space while improving credit quality. Fueled by the Cash for Clunkers program, revenue for its auto segment grew 12 percent from the second quarter. In August alone, the program helped the auto segment generate a record $1.5 billion in auto originations.
“The loans originated under this program have been high quality with higher levels of cash down and better customer credit scores than existing auto loans in our portfolio,” said Atkins.
On a quarter-over-quarter basis, total outstanding auto loans were up 5 percent. Loan losses were down 5 basis points from the second quarter, which the company attributed to its proactive risk mitigation efforts. Accounts 30 days past due represented 2.21 percent of the company’s $26 billion indirect auto loan portfolio for the quarters. In the second quarter, accounts 30 days past due represented 2.39 percent of the company’s $24.5 billion auto loan portfolio.
“While auto losses typically rise during the second half of the year, losses in our core indirect auto portfolio were actually down slightly from the second quarter, reflecting the benefit of higher used car prices, with the 6 Manheim Used Car Index at record levels,” said Atkins. “We also benefitted from an improved customer mix within our portfolio, and the tighter underwriting standards we put in place at the start of this cycle.”
Commenting on the company’s purchase of Wachovia, Atkins said the company is seeing earlier-than-expected contributions to earnings and capital growth from Wachovia. He added that the company is on track to achieve the originally targeted $5 billion of annual run rate savings upon full integration, which is expected by the end of 2011.
“After having begun to consolidate the two banks in the three quarters since we have owned Wachovia, we are now beginning to realize about 1/3 of these saving on a run-rate basis,” said Atkins, who added that the first banking state conversion, in Colorado, is slated for November. “We have very detailed plans to achieve the balance of the savings over the next two years as the systems integration and store conversions are completed in 2011.”