Can A UBS Takeover Solve Wells Fargo's Revenue Problem?

well Fargo’s uninspiring third quarter revenue  numbers sent its stock plummeting nearly 8% this afternoon but there may be a solution to the bank’s long-term revenue concerns.

Shares of the fourth largest bank were trading around $24.60 this afternoon. “What you’re seeing is a reaction to Wells Fargo‘s top line decline. It’s a bit scary to see that take a hit,” says SNL financial senior analyst Tyler Hall.

Indeed, revenue at the fourth largest U.S. bank fell short of analysts’ expectations by $600 million as the bank reported $19.6 billion in revenue while the consensus forecast for $20.2 billion. Revenue in the second quarter stood at $20.4 billion.

What’s perhaps keeping the bank’s stock from falling further is that it managed to post a record profit of $4.1 billion, a 21% jump from last year. But with the top line taking a hit that means the boost in profits came with help from other areas like reduced expenses, for instance.

Noninterest expense was $11.7 billion, down $798 million from second quarter 2011 and down $576 million from a year ago. Further the bank’s cost-cutting initiative called Compass is expected to help the bank reach a non-interest expense goal of $11 billion by the end of next year. In the third quarter that figure was at about $11.68 billion, down from $12.25 billion in the same quarter last year.

A bank that can show it’s able to make appropriate cost cutting measures is important for investors but as Hall notes a firm can only rely on such measures to boost profits for so long.

We’ve seen a lot of that happening lately as banks have been releasing provisions for credit losses as a way to boost profits but those net income figures don’t tell the true story of what was going on with sales. “You want to see that revenue number increase in the long run,” he says.

Banks are facing particularly difficult environment on that front. The economy is slumping along while at the same time banks are facing regulations that restrict the fees they once charged customers and merchants. For instance, the Credit Card Accountability, Responsibility and Disclosure Act keeps companies from collecting overdraft fees as easily as they once were able to. The Durbin Amendment which went into effect on October 1 (so the revenue losses won’t be seen until the 4th quarter) erases billions in annual fees the banks used to be able to collect from retailers.

So, Wells Fargo isn’t alone on the hunt for revenue. Bank of America is also expected to struggle on the top line when it reports earnings tomorrow. Analysts expect a drop in revenue to $25.95 billion from $26.7 billion a year ago, and nearly $30 billion in the previous quarter.

Of course banks’ struggles with top line growth have mostly been baked into analysts’ forecasts but just how banks will make up for those billions in fees has yet to be figured out. Those hated debit card fees are one approach with Bank of America leading the charge on monthly $5 fees. Wells Fargo and JPMorgan Chase are is also testing fees for debit card use. Citi is meanwhile planning to raise its minimum balance requirements and monthly maintenance fees come December.

Posted in: World business