In a welcome yet entirely surprising turn of events, banking giant Wells Fargo, announced Thursday that it posted a record $3 billion profit for the first quarter of the year, further fueling hopes that perhaps, the end of the recession may indeed be in sight.
Official bank reports for the first quarter are not expected until the next week or two, but the sneak peak into Wells Fargo’s profitability which blew way past analysts’ expectations has taken both the financial community and the market completely by storm.
As a result, the week’s early closing (markets are closed for Good Friday) ended on a high note with bank stocks leading the rally and the Dow Jones industrial average jumping by 246 points. Since October 2007, the blue chips haven’t posted five straight weekly gains – until now. While the week started out with much uncertainty, Thursday’s surge was enough to culminate in the market’s fifth straight week of gains.
All’s well with Wells Fargo
While the public has come to expect nothing but dismal news as far as bank performances are concerned, Wells Fargo’s profit showing, the highest ever in the bank history, is certainly an impressive feat, albeit, a dubious one for some.
It is best however to remember that several factors contribute to Wells Fargo’s unexpected profit showing:
First, Wells Fargo is considered to be among the healthiest of the big banks. Owing to its less risky investments and stricter lending standards, it has not suffered as much exposure to bad loans as its peers. Moreover, with the acquisition of Wachovia finalized last January 1, Wells Fargo has become simply bigger and better.
The bank also attributes its record performance to the significant increase in its mortgage applications. Wells Fargo reportedly released some $100 billion in mortgage loans during the quarter, with applications rising to a 64% leap from the last quarter of 2008. And with cheap money available – banks are currently borrowing from each other through the Fed at a rate of 0.2% — this can absolutely churn out a good income for any company. Stock market’s highest surge in two months
With the exception of the past five weeks’ winning streak, stock market rallies have become few and far between since its peak in 2007. Wells Fargo’s latest announcement has given the market more than enough reason to soar, closing at a two-month high.
The banking sector got the biggest boost of all. Bank of America® leads the pack with a 35.5% increase, followed by Wells Fargo, JP Morgan Chase, and Citigroup, going up by 31.7%, 19.4%, and 12.6% respectively.
With the definite indication of a thawing credit market, hopes of increased consumer spending are on the rise as well. Stock gains were not limited to banks alone but showed also in the technology, homebuilding, and transportation industries.
The end in sight? While the credit market is certainly showing signs of ending its hiatus, this should by no means be taken as conclusive proof of a quick economic recovery in the near future. For one, unemployment remains to be a big problem. In addition, with financial reports coming soon, how other banks fare would largely determine how the economy would go in the next few weeks. As opposed to Wells Fargo’s robust earnings, financial analysts anticipate other big banks specifically Citigroup and Morgan Stanley, to report losses for their first quarter operations.
Even Wells Fargo CFO Howard Atkins cautions against getting too keyed up about the results. “It’s premature to conclude the economy has turned”, Atkins said in an interview with The Associated Press.
He remains optimistic however with the bank’s prospects, supported by the government’s moves to lower down interest rates significantly. “All I can tell you is, we’re seeing a lot of business”, Atkins added.