Struggling with costly acquisitions, Wells Fargo & Co. and Banc One Corp. on Tuesday turned in surprisingly poor second-quarter earnings results.
Wells Fargo, the nation's ninth-largest bank, reported that earnings fell 37% from a year earlier, to $228 million, due to higher-than-expected expenses stemming from its acquisition of First Interstate Bancorp. Wells had warned last week that earnings would be below expectations-but the actual results were 3 cents a share worse than even the revised consensus forecast.
Banc One, the 10th-largest bank, reporting myriad special charges mostly associated with the acquisition of credit card issuer First USA, said quarterly income declined 96% to $15.8 million.
The lower-than-expected results for the two banks came on a day when other large banks, including Chase Manhattan Corp., Citicorp, Mellon Bank Corp., and Comerica, satisfied analysts with predictable earnings increases.
Acquisitions have resulted in disappointing earnings for banks before, but the setbacks for Wells Fargo and Banc One are especially startling given the firms' sterling track records.
"The results have got to have a sobering effect on companies contemplating hostile acquisitions," Bruce W. Harting of Lehman Brothers said, referring to Wells.
Mr. Harting cautioned that "buyers have to be very certain that the cost- cuts assumptions they are making in this part of the cycle are conservative."
Wells earned a reputation for near-ruthless efficiency after its 1986 acquisition of Crocker National Corp. In that $1 billion transaction, Wells nearly doubled its size while cutting the cost structure of Crocker virtually in half. Many analysts still regard it as the best-managed banking merger ever.
Banc One pioneered the concept of acquiring other banks and was for years regarded as the country's premier superregional bank-indeed, as the model for that class of banking company.
Banc One's 67 cent per share earnings result was 11 cents short of analyst expectations, while Wells' $2.49 figure fell a whopping 45 cents lower than what analysts had expected.
"The earnings we reported this morning are clearly a disappointment for shareholders, employees, and the senior management of this company," said Paul Hazen, Wells Fargo's chairman and chief executive officer, in a statement Tuesday.
Though the news sent shares of Wells Fargo tumbling by $5 earlier in the day, the stock recovered to close at $267, a $1.50 gain. Banc One closed down 19 cents, at $48.75.
At San Francisco-based Wells Fargo, several analysts did note some bright spots in an otherwise bleak report.
At the end of the second quarter, loan balances ticked up 1% to $250 million at the $100 billion-asset bank company.
"If you look at the loan portfolio and squint your eyes a little bit, you can see a trace of loan growth that may set the stage for more improvement in the next quarter," said Thomas F. Theurkauf, an analyst with Keefe, Bruyette & Woods Inc.
"This was indicative of some pickup in their small business lending," added Joseph K. Morford 3d, an analyst with Alex. Brown. "That is encouraging."
Moreover, fee income rose 6.2%, to $679 million, while noninterest expenses fell 2.4% to $1.25 billion as a result of cost savings associated with the First Interstate merger.
However, those decreases were more than offset by a more than fourfold increase in operating expenses to $180 million for the quarter. The increase was attributed largely to "the resolution of various operational and back office issues," related to the merger, the bank said in a statement.
Moreover, net interest income fell 12% to $1.15 billion, and the bank's average loans for the period fell by 9%, to $64.62 billion.
Also, the difference between what the bank paid for funds and what it earned on loans and securities narrowed to 5.93%, from 6.03%.
Wells also continued to experience a deposit runoff. The company had $73.8 billion in total deposits on June 30, a 12% decline from the year-to- date figure 12 months earlier. Observers cited the loss of former First Interstate customers alienated by Wells' high-tech, low-touch approach.
"I'm shocked they lost as much as they did in deposits," said Jay Tejera, an analyst with Dain Bosworth Inc.
Analysts reaction to Banc One's earnings was mixed. Many were expecting the special charges, but the analysts had varying sentiments on whether the company will be able to rebound and post better earnings in the future.
"Revenue growth was sluggish, there was higher than expected chargeoffs and higher than expected credit quality costs," said Fred Cummings, an analyst with McDonald & Company Securities in Cleveland.
Analysts said the acquisition of credit card giant First USA still appears to be a good, strategic fit.
Anthony Davis, an analyst with Dillon, Read & Co. said a bigger concern with the $115.5 billion-asset Banc One is revenue growth.
"I applaud their idea to try to clean up as much as they can this quarter," he said, "but I'm disappointed in the core earnings."
Banc One said excluding after-tax charges of $337 million related to the acquisition of credit card company First USA, a planned closing of 200 branches and the writeoff of costs associated with a scrapped software program, its per share earnings were 67 cents.
That still fell short of analysts' projections of 76 cents per share, but Banc One officials said estimates were widely disparate and therefore an unreliable measure.
"When the dust settles, the bottom line is Banc One's old credit card portfolio was lousy," Mr. Mayo said.
Of the special charges, $241 million is related to First USA, which includes integration costs and a $130 million loan-loss provision.
The company said $96 million in one-time charges would cover the expense of consolidating 200 branches in major urban markets and replacing them with automated locations over the next 18 months. It also will cover expenses related to a plan abandoned recently to develop software, known as Strategic Banking System, with EDS.
Net interest income was up 7.4% to $1.4 billion, while noninterest income was up 7.5% to $831 million. Noninterest expense was up 39% to $1.7 billion. Provision for credit losses nearly doubled from a year earlier to $396 million.
Citicorp reported net income of $1.02 billion, or $2.10 a share, up 8% from the same period last year and in line with analyst estimates.
Shares of the nation's second-largest banking company closed down $3.12 to $125.37 a share.
Income from Citicorp's consumer banking operations-which includes retail Citibanking, credit cards, and private banking-fell 3%, to $471 million, even though revenues were up 6%, to $3.5 billion.
The bank attributed the decline in income to continued erosion in its credit card business, particularly in the United States. Credit costs in the quarter rose 21%, to $922 million. Chargeoffs reached 6.51% of receivables, up from 5.41% last year.
"We continue to produce good results, although global spread compression and our U.S. card business present challenges," said Chairman John S. Reed in a statement. "Our assumption is that the highly competitive marketplace is a permanent reality."
"There is not much good news," said Diane B. Glossman, an analyst at Salomon Brothers, referring to the credit card business. "Their losses went up and their ratios went up."
Citicorp's credit card woes are not unusual, as many of the banks reporting earnings this quarter showed higher chargeoffs. Analysts said slowly declining delinquency rates could be a positive sign, however.
"They point toward an improvement, but we are remaining cautious," Ms. Glossman said.
Private banking income grew 10%, to $80 million, on revenues of $278 million, reflecting the growth of the business overseas, Citicorp said.
Citicorp said its corporate banking income was up 5%, to $665 million. Revenues grew 11%, to $2 billion, on the strength of trading and investment banking.
Global relationship banking, which includes trading and venture capital, grew 15%, to $242 million on revenue of $1 billion. Trading revenues grew 38.8%, to $243 million. Venture capital revenue grew 61.6%, to $173 million.
Total fees and commissions grew 8%, to $2.4 billion. Fees from foreign exchange, in particular, grew 45%, to $311 million.
Citicorp's expenses grew 7%, to $3.17 billion. Analysts said the bank was making good progress in its program to invest in system upgrades and in its investment toward expansion overseas.
"They are pursuing some bold strategic initiatives that will ultimately help them sustain above average growth," said Arthur Soter, an analyst at Morgan Stanley & Co.
Chase's net income, when including restructuring costs from its 1996 merger with Chemical Banking Corp., was $925 million, up 8% from last year.
But the bank's operating net income, which analysts have been following more closely, was $969 million, or $2.11 a share, up 11% from last year.
The result beat consensus estimates by 4 cents.
"Thumbs up," said George M. Salem, an analyst at Gerard Klauer Mattison. "Their trading and corporate finance revenues were at record levels."
Income from global wholesale banking, which includes trading, venture capital, and commercial lending, grew 24%, to $685 million. Revenues grew 8.4%, to $2.3 billion.
Trading revenues rose 25%, to $655 million. Investment banking and corporate lending revenues grew slightly to $560 million from $556 million. But fees jumped 63% from the first quarter of 1997, $274 million.
"Corporate finance was a very important number for (Chase) in order to make its earnings target," said Mr. Salem.
Trust, custody and investment management fees grew 6.2%, to $321 million. Revenue from asset management and private banking grew 5.2%, to $178 million.
On the consumer side, income fell 4%, to $330 million, but revenues grew 6%, to $2.2 billion. Chase attributed the decline to loan losses and increased marketing and new product expenses.
Net chargeoffs on credit cards increased 37%, to $383 million. That represented 5.99% of receivables, up from 4.78% last year. But analysts said they were heartened that Chase's credit quality appeared to be better than Citicorp's and other banks that have more substantial business in credit cards.
Mortgage banking, which was in the doldrums at Chase until a reengineering project earlier this year, showed a 74% gain in income, to $47 million, on revenues of $214 million. Overall, loans grew 5.7%, the bank said.
Expenses grew 6.3%, to $2.5 billion, including $71 million in restructuring charges and expenses. Chase said it had achieved $185 million in incremental merger savings during the quarter that were offset by investments in new technology and compensation for its trading staff.
Chase also raised its original restructuring expense target by $100 million, to $125 million. Analysts said they were surprised by the announcement.
"The expenses grew a little more than we had expected," said Ms. Glossman from Salomon Brothers. "It's been an on-going issue at Chase."
Comerica Inc. posted solid second-quarter earnings of $130 million, up 10% from a year earlier.
Earnings per share at the Detroit company increased 16%, to $1.16, beating analyst consensus estimates by 3 cents.
Fee income played a significant role in driving Comerica's healthy results, analysts said.
"Their over-$100 billion in trust assets is the crown jewel of the company," said Anthony J. Polini, an analyst with Advest Inc. "It produced some strong income."
Excluding the effect of divestitures and securities gains and losses, fee income climbed 11% to $121 million. However, noninterest expenses remained essentially flat-barring divestiture expenditures-as a result of cost control efforts, the bank said.
The second quarter numbers benefited from a companywide cost-cutting campaign, said Eugene A. Miller, chairman and chief executive of the $36 billion-asset company.
"We are taking a close look at what kind of work we are doing that can just go away," Mr. Miller said in an interview Tuesday. His favorite anecdote: Comerica has whittled the number of different-sized envelopes it uses from 550 to 50. The company plans to boost operating income $110 million by spring 1998, Mr. Miller added.
"They are really focused on improving the overall efficiency of their company," agreed Joseph C. Duwan, an analyst with Keefe, Bruyette & Woods Inc. "There will be even more benefits coming in the second half as the restructuring continues to pay off."
Mellon Bank Corp.
Mellon Bank Corp. of Pittsburgh said income rose 10% to $186 million, or 71 cents per share, boosted by fee businesses. Per share earnings were in line with analysts' estimates.
Mellon, with $43.7 billion of assets, said the gains came mostly from its noninterest businesses. Increases in mutual fund and other asset management businesses and institutional trust helped boost fee income 14% to $540 million. Net interest income was down $2 million from a year earlier to $370 million. Expenses were up 6% to $571 million.
James Schutz, an analyst with ABN Amro Chicago Corp., said he was particularly pleased with stronger-than-expected increases in trust income. "It's a good year-over-year gain," he said. "The mutual fund revenues are up modestly, nothing to jump up and down about, but the rest of the trust area was outstanding."
"All in all, it was a very satisfying quarter for fee income," Mr. Schutz said.
Mellon also announced a stock buyback of $6 million shares. +++
Chase Manhattan Corp.
New York Dollar amounts in millions (except per share) Second Quarter 2Q97 2Q96 Net income $925.0 $856.0 Per share 2.00 1.79 ROA 1.06% 1.08% ROE 19.23% 18.67% Net interest margin 2.81% 3.15% Net interest income 1,982.0 2,005.0 Noninterest income 2,158.0 1,949.0 Noninterest expense 2,471.0 2,324.0 Loss provision 189.0 250.0 Net chargeoffs 189.0 250.0 Year to Date 1997 1996 Net income $1,852.0 $767.0 Per share 3.97 1.46 ROA 1.09% 0.49% ROE 19.18% 7.47% Net interest margin 2.95% 3.28% Net interest income 4,033.0 4,155.0 Noninterest income 4,257.0 3,834.0 Noninterest expense 4,918.0 6,417.0 Loss provision 409.0 495.0 Net chargeoffs 409.0 597.0 Balance Sheet 6/30/97 6/30/96 Assets $352,033.0 $321,761.0 Deposits 183,744.0 168,343.0 Loans 159,957.0 151,274.0 Reserve/nonp. loans 356% 246% Nonperf. loans/loans 0.61% 0.99% Nonperf. assets/assets 0.31% 0.51% Nonperf. assets/loans + OREO 0.69% 1.08% Leverage cap. ratio 6.60% 6.60% Tier 1 cap. ratio 7.80%(a) 8.00% Tier 1+2 cap. ratio 11.40%(a) 11.80%
Citicorp New York Dollar amounts in millions (except per share) Second Quarter 2Q97 2Q96 Net income $1,024.0 $952.0 Per share 2.10 1.86 ROA 1.40% 1.43% ROE NA 19.40% Net interest margin 5.00% 5.25% Net interest income 3,454.0 3,351.0 Noninterest income 2,448.0 2,265.0 Noninterest expense 3,173.0 2,978.0 Loss provision 512.0 479.0 Net chargeoffs 487.0 429.0 Year to Date 1997 1996 Net income $2,019.0 $1,866.0 Per share 4.11 3.61 ROA 1.41% 1.40% ROE NA 19.00% Net interest margin NA NA Net interest income 6,903.0 6,614.0 Noninterest income 4,840.0 4,408.0 Noninterest expense 6,342.0 5,838.0 Loss provision 935.0 973.0 Net chargeoffs 885.0 873.0 Balance Sheet 6/30/97 6/30/96 Assets $304,293.0 $266,824.0 Deposits 198,690.0 175,783.0 Loans 178,914.0 167,873.0 Reserve/nonp. loans 195.80% 139.10% Nonperf. loans/loans 1.70% 2.30% Nonperf. assets/assets 1.30% 1.90% Nonperf. assets/loans + OREO 2.20% 3.00% Leverage cap. ratio NA NA Tier 1 cap. ratio 8.20%(a) 8.40% Tier 1+2 cap. ratio 12.00%(a) 12.40%
Wells Fargo & Co. San Francisco Dollar amounts in millions (except per share) Second Quarter 2Q97 2Q96 Net income $228.0 $363.0 Per share 2.49 3.61 ROA 0.92% 1.35% ROE 6.88% 9.77% Net interest margin 5.93% 6.03% Net interest income 1,150.0 1,304.0 Noninterest income 679.0 639.0 Noninterest expense 1,246.0 1,277.0 Loss provision 140.0 - Net chargeoffs 212.0 178.0 Year to Date 1997 1996 Net income $568.0 $627.0 Per share 6.12 8.39 ROA 1.12% 1.60% ROE 8.46% 13.52% Net interest margin 6.03% 6.08% Net interest income 2,366.0 1,980.0 Noninterest income 1,319.0 993.0 Noninterest expense 2,363.0 1,844.0 Loss provision 245.0 - Net chargeoffs 413.0 291.0 Balance Sheet 6/30/97 6/30/96 Assets $100,180.0 $108,586.0 Deposits 73,748.0 83,868.0 Loans 65,689.0 70,541.0 Reserve/nonp. loans 302.3% 306.3% Nonperf. loans/loans 0.90% 1.30% Nonperf. assets/assets 0.80% 0.90% Nonperf. assets/loans + OREO 1.20% 1.40% Leverage cap. ratio 6.70% 6.40% Tier 1 cap. ratio 7.50% 7.40% Tier 1+2 cap. ratio 11.40% 11.20%
Comerica Inc. Detroit Dollar amounts in millions (except per share) Second Quarter 2Q97 2Q96 Net income $130.0 $118.0 Per share 1.16 1.00 ROA 1.49% 1.37% ROE 21.31% 17.73% Net interest margin 4.57% 4.55% Net interest income 364.0 356.0
Noninterest income 121.0 121.0 Noninterest expense 249.0 270.0 Loss provision 34.0 25.0 Net chargeoffs 21.0 18.0 Year to Date 1997 1996 Net income $253.0 $235.0 Per share 2.26 1.98 ROA 1.48% 1.35% ROE 20.86% 17.50% Net interest margin 4.58% 4.47% Net interest income 715.0 706.0 Noninterest income 251.0 258.0 Noninterest expense 498.0 549.0 Loss provision 75.0 54.0 Net chargeoffs 38.0 41.0 Balance Sheet 6/30/97 6/30/96 Assets $35,854.0 $35,386.0 Deposits 22,677.0 22,948.0 Loans 27,725.0 26,029.0 Reserve/nonp. loans 603.34% 290.36% Nonperf. loans/loans 0.24% 0.48% Nonperf. assets/assets 0.26% 0.45% Nonperf. assets/loans + OREO 0.34% 0.62% Leverage cap. ratio 6.97% 7.72% Tier 1 cap. ratio 6.91% 8.04% Tier 1+2 cap. ratio 11.08% 11.39%
Banc One Corp. Columbus, Ohio Dollar amounts in millions (except per share) Second Quarter 2Q97 2Q96 Net income $15.8 $395.2 Per share 0.02 0.66 ROA 0.06% 1.54% ROE 0.63% 16.90% Net interest margin 5.41% 5.43% Net interest income 1,366.2 1,272.4 Noninterest income 830.5 772.2 Noninterest expense 1,724.2 1,238.0 Loss provision 395.8 194.7 Net chargeoffs 293.8 172.1 Year to Date 1997 1996 Net income $397.7 $818.0 Per share 0.67 1.35 ROA 0.72% 1.59% ROE 8.17% 17.39% Net interest margin 5.47% 5.44% Net interest income 2,737.8 2,548.7 Noninterest income 1,637.7 1,528.7 Noninterest expense 3,033.2 2,430.0 Loss provision 667.7 382.8 Net chargeoffs 541.1 350.4 Balance Sheet 6/30/97 6/30/96 Assets $115,491.6 $104,791.7 Deposits 76,963.9 72,540.5 Loans 84,200.1 73,684.3 Reserve/nonp. loans 343.6% 283.8% Nonperf. loans/loans 0.47% 0.53% Nonperf. assets/assets 0.39% 0.44% Nonperf. assets/loans + OREO 0.53% 0.62% Leverage cap. ratio 8.47%(a) 8.72% Tier 1 cap. ratio 8.19%(a) 10.11% Tier 1+2 cap. ratio 12.81%(a) 13.86%
Note: Restated for pooling of interest acquisition
Mellon Bank Corp. Pittsburgh Dollar amounts in millions (except per share) Second Quarter 2Q97 2Q96 Net income $190.0 $179.0 Per share 0.71 0.63 ROA 1.79% 1.70% ROE 21.90% 20.40% Net interest margin 4.29% 4.30% Net interest income 370.0 372.0 Noninterest income 540.0 474.0 Noninterest expense 587.0 540.0 Loss provision 25.0 25.0 Net chargeoffs 32.0 26.0 Year to Date 1997 1996 Net income $381.0 $358.0 Per share 1.40 1.25 ROA 1.81% 1.73% ROE 21.50% 20.00% Net interest margin 4.33% 4.32% Net interest income 740.0 735.0 Noninterest income 1,076.0 978.0 Noninterest expense 1,169.0 1,100.0 Loss provision 50.0 50.0 Net chargeoffs 64.0 54.0 Balance Sheet 6/30/97 6/30/96 Assets $43,712.0 $42,769.0 Deposits 31,326.0 31,704.0 Loans 28,144.0 27,356.0 Reserve/nonp. loans 568% 359% Nonperf. loans/loans 0.32% 0.47% Nonperf. assets/assets 0.37% 0.47% Nonperf. assets/loans + OREO 0.57% 0.74% Leverage cap. ratio 8.20%(a) 7.24% Tier 1 cap. ratio 8.00%(a) 7.51% Tier 1+2 cap. ratio 13.30%(a) 11.89%
(a) estimated ===