Why Wells Fargo's loan losses are plunging

Mon Oct 28, 2013 3:17pm EDT
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By Peter Rudegeair

(Reuters) - Wells Fargo & Co's (WFC.N: Quote) loan book is performing better than many of its peers and better than even the bank expected in the middle of the last year, thanks to factors including higher house prices and tougher loan standards.

In the third quarter, Wells posted its lowest quarterly loan loss rate in at least nine years. The lower losses allowed the bank to dip into funds it set aside to cover bad loans, boosting profits by about $600 million after taxes.

Part of the improvement stems from a 2009 move to tighten underwriting standards for consumer loans, like more stringent requirements for verifying prospective homeowners' income.

Residential real estate loans made since then "have virtually no losses," Chief Financial Officer Tim Sloan said at an investor conference in September.

Another factor helping loan performance: post-crisis loans make up a larger share of Wells Fargo's portfolio overall now, driving quality higher. Nearly half the commercial loans and around 45 percent of consumer loans on the books at the end of the third quarter were made after the financial crisis.

Meanwhile, home prices increased 12.4 percent nationwide in August from a year earlier, according to CoreLogic. That had a big impact on the quality of Wells Fargo's home equity loans, where losses, also called charge-offs, fell by nearly 3/4 since the third quarter of 2012.

Many of these loans are hovering just below or just above the value of the home, so as home prices go up, the losses on the loans can change dramatically, a spokeswoman said. Over half of the decline in loan losses between the third quarters of 2013 and 2012 came out of Wells Fargo's home equity portfolio.

"When you put all that together," Sloan told Reuters in a recent interview, "it makes for a rapid improvement in credit quality."   Continued...

The logo for Wells Fargo bank is pictured in downtown Los Angeles, California July 17, 2012. REUTERS/Fred Prouser