Updated from 9:05 a.m. ESTWells Fargo ( WFC) shares were on the rise, despite posting a 38% drop in fourth-quarter profit due to the deepening slump in the mortgage market. In the final three months of 2007, the bank, the nation's second biggest mortgage lender after Countrywide Financial ( CFC), reported profit dropped 38% to $1.36 billion, or 41 cents a share, compared to $2.18 billion, or 64 cents a share, in the year-ago period. Wells Fargo met analysts' profit expectations of 41 cents a share on roughly $10 billion of revenue. Shares recently were up 66 cents, or 2.5% to $27.15. The fourth-quarter results included a previously announced charge to set aside extra money to protect against loan losses in home equity loans -- the company's riskiest loan base. Wells Fargo announced in November that it would take a
For the full year, Wells Fargo posted a profit of $8.06 billion, or $2.38 a share, 4% lower than the $8.42 billion, or $2.47 a share it reported in 2006. The company said it had "record revenue" for the full year of $39.4 billion. Wells said that average loans rose 20% to $374 billion in the fourth quarter vs. a year earlier, while commercial and commercial real estate loans rose 24%. Core deposits rose 11% to $315 billion, it said. In addition, the company's net interest margin -- the profit it makes on taking deposits and lending them out again -- rose 7 basis points from the third quarter to 4.62%. Lori Appelbaum, an analyst at Goldman Sachs, said in a note Wednesday morning that she expected Wells Fargo's stock to rise since there were concerns that credit quality in fourth quarter could have been worse than the company previously warned, given its high exposure to California, a state she views as currently in a recession. Moody's Investors Service affirmed on Wednesday its Aa1 rating and stable outlook on Wells Fargo and its subsidiaries. The bank is rated A for financial strength and Aaa for deposits, Moody's said. "Wells Fargo has the financial flexibility to absorb the relatively high level of charge-offs in its home equity portfolio that Moody's expects could occur over the next six to eight quarters," Moody's said. But the bank's losses in its ongoing home-equity portfolio going forward could be higher than previously expected, Moody's added. "This particularly results from loans with high combined-loan-to-values in tandem with the home-value depreciation that has occurred, and is expected to continue to occur, in many regions in which Wells Fargo operates," it said. "
The default frequency in this portfolio is likely to rise and severity of loss will be high." Atkins said in a pre-recorded conference call that "given the weakness in housing and the overall state of the U.S. economy, it is likely that charge-offs will be higher in 2008 than they were in 2007." "But we believe our business model, the actions we have already taken to reduce risk, and our deep, experienced team -- which has successfully managed through many prior cycles -- will position us properly for the challenges that may be ahead, especially relative to our large bank peers," he said.