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Wells Fargo reports higher Q3 net income

Wells Fargo & Co (WFC-N) reported a weaker-than-expected profit as its lending margins shrank in a weak economy. The rare misstep for the fourth-biggest U.S. bank pushed its shares down sharply.

The bank eked out higher income, but the results disappointed analysts on many fronts. Net interest income, a measure of lending profit, fell 5 percent, and fee income from making home loans and other services fell 7 percent, a steeper-than-expected drop. Revenue fell nearly 4 percent from this year's second quarter.

"The economic recovery has been more sluggish and uneven than anyone anticipated," CEO John Stumpf said in a statement.

Profit at Wells Fargo, the biggest U.S. home loan servicer, was 72 cents US a share, a penny short of the average analyst estimate, according to Thomson Reuters I/B/E/S.

Banks' lending margins are under pressure as intervention from the Federal Reserve pulls down long-term rates. For Wells Fargo, net interest margin tumbled to 3.84 percent from 4.25 percent.

"Right off the bat, net interest margin declined more than expected," said RBC Capital Market analyst Joe Morford.

Wells Fargo executives said some of the margin shrinkage is a result of customers bringing the bank more deposits than it could quickly invest in higher-paying loans. In time, the bank hopes to make more money from those funds, Morford said.

Because the bank set aside less money to cover loan losses during the quarter compared with last year's quarter -- $1.81 billion down from $3.44 billion -- Wells Fargo's bottom line for common shareholders rose to $3.84 billion from $3.15 billion.

Wells Fargo's report comes as the industry struggles to hold onto recent profits after having lost tens of billions of dollars in the financial crisis. Financial company earnings in the third quarter are expected to be up only a fraction of a percent from a year earlier, and still less than half as much as they were five years ago, according to Thomson Reuters Proprietary Research.

Bank stocks have been among the stock market's worst performers this year on fears that their earnings will be flat to down for years on less demand for loans and the low interest rates of the weak economy.

Wells Fargo's loan portfolio was up 1.1 percent to $760 billion, with commercial loans up 3 percent in the quarter.

The loan growth was partly from higher demand and partly a matter of taking business from competitors, Chief Financial Officer Tim Sloan said in an interview. He said the economy is growing, but "choppy."

EXPECTING MORE

Analysts and investors have tended to expect more from Wells Fargo recently than from its bigger competitors because its shares are less subject to the ups and downs of the financial markets.

Shares of Bank of America, JPMorgan Chase & Co and Citigroup -- which earn more of their income from underwriting stocks and bonds and providing corporate takeover advice -- have fallen more this year than Wells Fargo's 14-percent loss through Friday.

"One reason we're a big fan of Wells Fargo is there's less volatility in the earnings," said Channing Smith, co-manager of the Capital Advisors Growth Fund, which owns Wells Fargo.

Wells Fargo said its earnings were boosted by releasing reserves of $800 million for bad loans, down from $1 billion in each of the first two quarters of this year.

Such releases amount to dipping into money previously set aside to cover bad loans and have been a significant part of bank earnings over the past year as lenders decided they set aside too much.

Wells executives told analysts in a conference call after the report to expect more release reserves as long as the economy does not turn down sharply.

The bank said it began "streamlining" staff functions and consolidating consumer lending businesses and several technology groups during the quarter. Noninterest expenses fell 5 percent from a year ago to $11.7 billion on lower personnel, merger and litigation costs. Under a program announced earlier, the bank wants to lower quarterly noninterest expenses to $11 billion by the end of 2012.

San Francisco-based Wells is looking to ramp up revenue by selling more products to East Coast customers following its 2008 purchase of Wachovia Corp. Over the weekend, the bank finished converting Wachovia branches to Wells Fargo signs and systems, the last major step in the acquisition.

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