MT Insider: Wells Fargo Q3 Earnings Beat Over-Shadowed By Declines in Mortgage Banking


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Wells Fargo ( WFC ) reported 3Q13 EPS of $0.99, $0.02 above analyst estimates. That said, the beat was over-shadowed by the steep decline in mortgage banking. Earnings were also helped by a loan loss reserve release and a lower tax rate which analysts give less credit for. Revenues fell short of estimates at $20.5 billion, compared to consensus at $21.1 billion.

Expenses declined 1% from Q2 2013 due to lower incentive compensation, although this was less than the revenue decline of 4% (which means that Wells Fargo's cost cutting initiatives for the quarter were not enough to offset lower revenues).

The company's efficiency ratio was 59.1%, just above its 55-59% target. By definition, an efficiency ratio measures how much the bank pays on operating expenses (and a lower ratio is better, which obviously wasn't the case in Q3).

Core mortgage production came in below estimates. Specifically, fee income in the division was $1.6 billion, down from $2.8 billion in Q2 2013 while origination fees dropped 49% to $1.25 billion. Applications declined 40% to $87 million, suggesting continued pressure in mortgage banking for the next few quarters.

Trust & investment fees declined by $218 million while investment banking fees were also lower (similar to JP Morgan - JPM although this was more or less expected as the brokerage business is seasonally lower in Q3).

Net Interest Margins ( NIM ) were down by 8 bps quarter over quarter, more than the street's forecast for a decline of 4 bps to 3.38%. According to management, compression was due to deposit growth, liquidity-related issuances (term deposits & long-term debt), the net impact of balance sheet re-pricing and lower income from variable sources.

Overall, Wells Fargo posted Return on Assets (ROA) of 1.53% and a Return on Equity (ROE) of 14%. The silver lining came from lower credit costs which should continue to support earnings. The Basel III Tier 1 common ratio was 9.54% (versus 8.54% last quarter), implying an improved company credit profile and refinements for commercial portfolios.

Separately, the company repurchased 50.9 million shares in 3Q13 (up from 26.7 million in Q2).

WFC 41.40 -0.03 -0.07

JPM 52.48 -0.03 -0.06

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Copyright (C) 2014 All rights reserved. Unauthorized reproduction is strictly prohibited.

This article appears in: Investing , Commodities
More Headlines for: NIM , WFC

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