This summary is based on the first quarter fiscal 2008 earnings call conducted by Wells Fargo & Company (WFC) on April 16, 2008.
Key Investors Issues
- Earnings per share dropped from 66 cents in prior year to 60 cents in Q1.
- Quarterly revenue increased 12% over previous year to $10.6 billion.
- The company had over 10 million active online consumers, up 13% from a year ago.
First Quarter Fiscal 2008 Financial Highlights
Wells Fargo earned $2 billion after tax or 6 cents a share in the first quarter.
This was despite a $2 billion pre-tax provision for credit losses, which included an additional $500 million credit reserve build. The firm’s ability to earn through these higher credit costs reflected the benefit of its diversified business model as well as attractive growth opportunities it has taken advantage of in these challenging markets.
Revenue of $10.6 billion was another record, up $1.1 billion, or 12% from a year ago.
On a linked-quarter basis, revenue grew 14%. Many of the firm’s businesses achieved double-digit, year-over-year revenue growth, including commercial banking, asset-based lending, insurance, international, wealth management, regional banking, debit and credit cards, mortgage banking, business direct, SBA lending and business payroll services. The company continued to have a good balance between loan and deposit spread revenue and fee-based revenue, reflecting record cross-sell in both retail and wholesale businesses.
The firm’s Wholesale and Commercial Banking Group, which serves middle market customers and select niches in the large corporate market, had double digit loan and double digit deposit growth.
Revenue grew $80 million, or 4% from first quarter 2007. Higher trust and investment fees, deposit service charges, foreign exchange income, institutional brokerage and insurance revenue were offset by a lower level of commercial real estate brokerage fees, which were very high a year ago, and a lower level of capital markets activity. The firm achieved record cross sell of 6.2 products per wholesale relationship and 7.7 products per middle market commercial banking relationship. Almost one of every three of the firm’s commercial banking offices had more than 8 products per customer relationship.
The Wholesale Banking Group’s average loans grew 29% year over year as a result of new customers and opportunistic, attractively priced acquisitions of high quality assets. Asset based lending, middle market lending, international, commercial real estate and specialized financial services, which include capital markets activities and relationships with Fortune 500 companies, all continued to experience double digit loan growth.
Wholesale Banking Group’s average core deposits were up $15 billion or 29% from first quarter 2007. The growth came primarily from large corporate and middle market relationships, international and correspondent banking customers and from higher institutional sweep and liquidity balances from its Asset Management customers.
The Insurance Services group had double digit revenue growth.
- Wells Fargo Insurance, Inc., the firm’s consumer and small business insurance group grew revenue by 17% from first quarter 2007, driven by sales of identity theft protection, debt cancellation and crop insurance products.
- Wells Fargo Insurance Services, Inc., the firm’s middle market commercial insurance broker, achieved 16% revenue growth adding seven new insurance brokerage businesses across the country last year.
- Despite the 7% decline in the S&P 500 index from a year ago, Wells Fargo Advantage Funds, the company’s mutual fund business, grew average assets by 28% from a year ago and ended the quarter with $156 billion in fund balances, becoming the second largest fund manager among US banks. This growth was driven by strong demand for Money Market Mutual Fund products. About 53 % of the Wells Fargo Advantage Funds were in the top two Lipper performance quintiles for the past three year period. Wholesale net income this quarter was only minimally impacted by the capital markets dislocation that has resulted in billions of dollars of write downs at other financial services companies.
- During the first quarter, $39 million in expenses were recorded for a previously disclosed capital support agreement provided to the firm’s AAA rated non government money market mutual funds, which had a small investment in one third party SIV that required some credit write downs. Wells Fargo does not act as a sponsor for any SIV’s. The firm also took $63 million of net write downs in its Commercial Mortgage held for sale portfolio as a result of widening credit spreads. At the same time, the continued market volatility in the first quarter created opportunities for the company’s financial products group to expand customer sales volume and earn higher spreads. While equity capital gains declined from a year ago, sales and revenue of equity, commodities, interest rate and brokerage fixed income products reached quarterly records.
The Community Banking Group, which includes regional banking, wealth management, home equity, mortgage banking and retail internet, had double digit revenue growth, up 16% from first quarter 2007.
This was driven by double digit fee and loan growth and strong deposit growth. Net income declined $72 million from a year ago, and included a pre-tax credit reserve build of $385 million.
During the first quarter,
regional banking achieved record core product sales of 5.8 million, up 17% from first quarter 2007. For the first time ever, the firm provided over 2 million solutions to customers in a single month. These exceptionally strong sales results continued to be driven by customer demand, improved store based service levels, higher productivity, and deeper customer penetration.
The firm’s sales growth benefited from greater banker productivity. The firm continued to invest in adding more sales people, with platform banker FTE’s up 7% from a year ago, but sales grew at almost two and a half times that rate. The company measures this increased productivity through core sales per platform banker FTE per day. In the first quarter, core sales per platform banker FTE was a record 5.64 per day, up from 5.08 per day a year ago, an 11% increase. Once again, Regional Banking achieved record cross sell. The average retail bank household had 5.6 products with Wells Fargo, up from 5.3 products a year ago and up from around three products 10 years ago. In order to increase cross sell from 5.3 to 5.6, regional banking had to increase the total number of products its customers owns by nearly three times the rate it grew the number of its retail bank households. Six of 32 regions now have an average retail bank household cross sell of over six. About 23% of the firm’s retail customers had over eight products. The long term goal, nearly double the amount of customers who bought eight products five years ago, and in top region, 32% of customers had over eight products with the firm.
