By Dow Jones Business News, October 11, 2013, 10:26:00 AM EDT
By Saabira Chaudhuri and Shayndi Raice
Improving consumer credit helped Wells Fargo & Co. ( WFC ) post a 13% jump in net income Friday, but the largest U.S.
home lender saw its mortgage business take a bigger hit than expected.
The fourth-largest U.S. bank by assets reported net income of $5.58 billion, compared with year-earlier income of $
4.94 billion. Per-share earnings, reflecting the payment of preferred dividends, were 99 cents versus 88 cents a year
earlier. Analysts polled by Thomson Reuters recently expected per-share earnings of 97 cents on revenue of $20.97
billion. Revenue dropped 3.5% to $20.48 billion.
Wells Fargo--seen as a bellwether for the U.S. housing market--reported mortgage banking non-interest income totaled $
1.61 billion, down 43% from year earlier. Its home lending originations amounted to $80 billion, compared with the $139
billion reported a year earlier and $112 billion in prior quarter. Applications dropped to $87 billion, compared with
the $188 billion reported a year earlier and $146 billion in prior quarter.
"As expected, mortgage banking revenue was lower in the quarter as the recent increases in interest rates reduced
refinance volume, but this impact was partially offset by improved credit and lower expenses," Chief Financial Officer
Tim Sloan said.
Despite the expectations of a soft mortgage banking quarter, analysts said the blow to Wells Fargo's large home loan
business was worse than anticipated. Shares fell more than 1% in early trading. The stock is up 19% this year.
Todd Hagerman, an analyst with Sterne Agee & Leach, said mortgage banking income was "well below expectations" and
said a nearly $30 million drop in the bank's forward pipeline is a "source of concern for investors heading into year
Bank executives warned that mortgage originations would fall in the third quarter, prompted by a decline in
refinancing activity that has come as a result of higher long-term interest rates. Executives have argued that the bank
is familiar with swings in the U.S. housing market and can reposition itself quickly to slim down mortgage costs and
bulk up other business to offset losses.
The results show how U.S. banks continue to rely on improved credit quality to eke out growth. Wells Fargo's provision
for credit losses was $75 million, down sharply from $1.59 billion a year earlier. While improving credit has helped
banks across the board in recent quarters, investors have been less than thrilled by this as it doesn't generally
reflect core earnings growth.
Net charge-offs, or loans lenders don't think are collectible, fell to 0.48% of average loans, from 1.21% a year
earlier and 0.58% in the second quarter.
"The headline number looks good and Wells once again posted record net income, but the beat was driven by a $900
million reserve release, better than expected credit trends, and investment gains," Keith Murray, an analyst with ISI
Group, said in a note. "We think investors were fairly ambivalent on the stock heading into earnings and we don't think
these results will change many opinions."
Wells Fargo's community banking division--essentially the retail bank--reported a profit of $3.34 billion, up 22% from
a year earlier and 3% from the previous quarter. However, earnings in its wholesale banking division, which lends to
corporations and has a small investment banking business, dropped 1% from a year earlier and 1.5% from the previous
quarter, to $1.97 billion.
The bank saw a modest 1% increase to $10.7 billion in its net interest income from the year-earlier period. But Wells
Fargo's underlying loan growth was strong, a sign that the San Francisco-based lender could be well positioned when
short-term interest rates rise. Total loans were up nearly 4% to $812.3 billion from the year-earlier period. Total
loans rose by $10.4 billion sequentially, compared with sequential growth of $2 billion in the second quarter.
The company attributed the loan growth to $5.2 billion of commercial real estate portfolio acquisitions. The bank said
the growth also came from areas like commercial and industrial loans, which were up 7.6%; credit card, which was up 7.4%
; and auto loans, which was up nearly 8%.
Wells Fargo's earnings report follows rival J.P. Morgan Chase & Co. ( JPM ), which earlier Friday reported its mortgage
loan originations had dropped 14% from the prior year and 17% from the second quarter, although it said mortgage banking
profit rose 13% from the year earlier, driven by lower provision for credit losses and noninterest expense.
The bank's net interest margin--the profit margin between lending and investing--was 3.38% versus 3.66% a year earlier
and 3.46% in the second quarter. The bank said that deposit growth was partially responsible.
Total average deposits were $1 trillion, up 8% percent from a year earlier and 6% from the second quarter.
Executives have stressed in the past that they are comfortable with short-term hits to margins because they believe
deposit growth will ultimately be beneficial for the company as interest rates rise and borrowing ramps up.
Results from Wells Fargo, which along with J.P. Morgan kicks off the third-quarter reporting season for large U.S.
banks, are closely watched as indicative of those to come from rivals. A persistently sluggish economy and weak loan
growth have meant banks have had to rely on reining in expenses and improving credit to grow their bottom lines.
But for the third quarter, Wells Fargo's noninterest expense was roughly flat at $12.1 billion from the year earlier.
The company said it slashed about 5,300 jobs in its mortgage unit but total full time employees was up 1% from the year
earlier period to 270,600.
Write to Saabira Chaudhuri at firstname.lastname@example.org and Shayndi Raice at email@example.com
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