Perhaps the most dramatic fallout from bank earnings reports this season was Wells Fargo & Co.'s fall from grace on Wall Street.
The San Francisco banking company's 1996 purchase of First Interstate Bancorp has failed to produce as expected for shareholders, and the stock has slumped. The situation worsened this month, when Wells warned that second-quarter earnings might fall 30% below the 1996 level-and then reported an actual shortfall of 37%.
The news sent the stock plunging. The share price closed Friday at $255.50, off from $279 the day before the preannouncement and a high of $320 on March 10.
A conference call failed to restore confidence among analysts, some of whom groused that they to stay well after working hours New York time to hear the explanations from the West Coast.
An especially scathing report came from a longtime champion of the stock, Carole Berger of Salomon Brothers. She slashed her rating from "buy" to "hold," complaining that the company in June "led us to believe that the deposit outflow had been stemmed, and that since the end of March there had been no material decline. However, this was not the case."
During the week of July 10, when Wells warned that a negative surprise was likely, the consensus among 16 analysts covering Wells' stock dropped by 2.51% to $18.65 per share for 1998. That trend continued last week, after the actual report came out.
Ms. Berger said she had "radically reduced" earnings estimates, by $3.30 to $16.50 per share for 1997 and to $19.25 from $25 for 1998.
Raphael Soifer of Brown Brothers Harriman, long a bear on Wells, cut his 1997 estimate to $13.80 from $14.50 upon the initial warning of a shortfall. On Wednesday he cut his estimate again, to $12.65. His 1998 earnings-per-share estimate was reduced to $17 from $18.25.
Thomas Theurkauf of Keefe Bruyette & Woods lowered his 1998 estimate from $18.50 to $15. "I could see the storm clouds on horizon for past several months," he said.
George Salem of Gerard Klauer Mattison sliced his earnings estimates for 1998 from $23.75 to $21 on a cash basis. He had reduced his rating to "hold" from "buy" in early June.
Wells' problems stem from a hemorrhaging of First Interstate customers, who have been leaving the merged entity in droves. Operating snafus due to the merger resulted in lost deposits and frustrated customers. Though customers were reimbursed-at a cost of $130 million to the bank-Wells' image has been badly tarnished, analysts said.
Wells' president William Zuendt, heir apparent to chief executive officer Paul Hazen, left the company unexpectedly when the merger went awry.
The bitter language in some of the reports suggests some analysts may feel betrayed.
In its contest with First Bank System Inc. to win prized First Interstate, Wells persuaded many analysts to consider the merits of its offer on the basis of cash earnings rather than reported earnings.
Because Wells was to account for the merger as a purchase, reported earnings would have been reduced by the amortization of goodwill each. But noting that the white knight, First Bank, planned to use pooling-of- interest accounting, which does not result in goodwill, Wells claimed cash earnings would rise if its own hostile bid prevailed.
In fact, second-quarter cash earnings dropped $1.10 from the same period last year, to $3.79 per share. Reported earnings dropped $1.12, to $2.49.
In the conference call with analysts the bank warned of further trouble in the third quarter, with a rebound expected to begin by the fourth quarter. But many analysts were skeptical.
Mr. Salem said 12% of the bank's deposit assets are gone, therefore "the earning power of this bank has been reduced.
"Deposits are sources of funds; loans are how you put deposits to use. You can't earn money without those items."
Mr. Salem is advising investors to "switch out of it and move into something with more predictability and more growth potential. This (stock) is only for investors who can tolerate more than average risk."
Mr. Soifer called Wells Fargo a "'show-me stock, " which he said will be "unlikely to outperform until a bottom has been reached and growth has resumed. Whether that will happen in the fourth quarter depends on customer attrition," which is ongoing, according to analysts.
"I don't think there's a quick fix on the revenue side," said Mr. Theurkauf.
Ms. Berger said the stock at this point is "dead money" at best, and "at worst still has some downside risk."
Her prognosis: "It will take Wells longer than expected to turn this around. There's tremendous amount of inertia with large banks. It's like turning a battleship, and this one is heading south."
One note of confidence came from Ronald I. Mandle of Sanford C. Bernstein. "I think they've cleared up their problems," he said."I see revenues bottoming out in the third quarter and growing from there."
Though Mr. Mandle cut his 1998 earnings estimate to $21.50 from $24, he said he believes the bank will outperform the market over next 12 months. He has a "buy" rating on the stock.
Regional bank fund manager James K. Schmidt, executive vice president of John Hancock Funds in Boston, is "somewhat disappointed in what's happened so far." Mr. Schmidt, who controlled 361,000 shares of the beleaguered bank as of June 30, said that though revenue losses were more than expected, "in the long run we have confidence in Wells Fargo."