Wells Fargo Reforms Finance Arm - Analyst Blog

On Wednesday,

(

) announced a restructuring of its consumer finance unit. The company would close 638 Wells Fargo Financial stores across the U.S., stop originating non-prime portfolio mortgage loans and lay off 3,800 positions as part of this restructuring.

According to the company, the requirement for a separate network of Wells Fargo Financial local offices no longer exists, following the company’s 2008 merger with Wachovia. This merger has enabled customers to have access to the company’s 6,600 Wells Fargo and Wachovia community bank stores and its 2,200 Wells Fargo Home Mortgage locations. Wells Fargo also pointed out that its financial stores have originated less than 2% of all its real estate loans in the first quarter of 2010.

As a result of this restructuring, Wells Fargo would incur pre-tax charges of approximately $185 million in total. Of this, around $137 million, or 2 cents per share, would be incurred in the second quarter while the remaining charges would be reflected in the second half of the year, primarily in the third quarter.

As part of the restructuring process, the company would also shed 3,800 positions within Wells Fargo Financial. This unit currently has 14,000 team members. Of this, Wells Fargo will abolish 2,800 positions in the next 60 days and another 1,000 positions within a year. The other employees will be absorbed in other Wells Fargo businesses.

Wells Fargo's first quarter 2010 operating earnings per share were 50 cents per share, well above the Zacks Consensus Estimate of 42 cents. The company, which is scheduled to report its second quarter earnings results on July 21, is expected to post earnings of 48 cents in the quarter according to the Zacks Consensus Estimate.

Although there is lot of uncertainty regarding the commercial sector, especially due to the credit crunch, regulatory and fiscal policy issues in the near term, we believe that Wells Fargo’s cross-selling ability, strategic Wachovia cost-integration and a diverse business portfolio along with better-than-expected growth in investment banking will drive long-term growth and add to the investors’ confidence. We also believe that this restructuring should help the company increase operating efficiencies.

Besides Wells Fargo,

(

) also initiated several restructuring initiatives. Citi aims at de-leveraging Citi Holdings, consisting of Citi’s non-core assets, through a number of steps that include joint ventures, divestitures, and asset run-offs. As a matter of fact, the company has already announced the sale of a number of its businesses within Citi Holdings.

Wells Fargo is currently rated as Zacks #3 Rank (Hold), implying that the stock is expected to perform in line with the broader U.S. equity market over the next one to three months. The stock has a long-term Neutral recommendation from us.