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 The NASDAQ OMX Group, Inc.

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This article appears in: Investing , Commodities

Referenced Stocks: NIM , WFC

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