Wells Fargo & Company
) is all set to lose significant amount of interest income in the
coming years due to refinancing the mortgages arising out of the
foreclosure settlement. The company stated this in its most
recent quarterly filing.
Wells Fargo will be refinancing the mortgages of around 33,000 to
36,000 borrowers, having an unpaid principal balance to the tune
of about $6.7-$7.4 billion. As a result, the company anticipates
reduction in interest income in the range of $1.8- $2 billion
($181-$200 million annually), which is $300 million higher than
the prior estimates.
Further, based on mix of loans to be refinanced, Wells Fargo
expects a 270 basis points dip in the weighted average note rate
and weighted average remaining life of these loans is anticipated
be 10 years. However, the actual number of borrowers opting for
refinance will definitely affect these estimates.
Under the refinance program, Wells Fargo is entitled to earn an
additional 25% credit for all refinance credits earned in the
first year of the program. If the company achieves the target, it
will earn an extra credit of up to $350-$390 million. Moreover,
the company anticipates total earned credit from this program to
be approximately $1.7-$2.0 billion.
The forgoing of interest income stems from the agreement that
Wells Fargo, along with
Bank of America Corporation
JPMorgan Chase & Co.
) and Ally Financial Inc., reached with the attorneys general of
49 states and several federal agencies in February this year,
over alleged faulty foreclosure practices. The total settlement
amount was $25 billion.
Wells Fargo's settlement share of $5.3 billion includes $900
million in a refinance program, $3.4 billion in consumer relief
programs and $1.0 billion in foreclosure assistance payment to
the Federal government and the states.
Wells Fargo expects the impact from the interest income loss to
be spread across several years. The company anticipates the low
interest income to negatively impact the net interest margin,
which is already pressurized in the low interest rate scenario.
As of September 30, 2012, NIM stood at 3.66% compared with 3.84%
in the prior-year period. Also, the refinance program is expected
to reduce the fair value of the loans refinanced in the region of
$1.4 billion to $1.6 billion.
Yet, we believe that robust capital levels, prudent expense
management as well as improvement in credit quality, albeit at a
slow pace, will support Wells Fargo's financials going forward.
Further, stress test clearance and sound capital deployment
activities will boost investors' confidence in the stock.
Wells Fargo currently retains a Zacks #3 Rank, which translates
into a short-term Hold rating. Considering the fundamentals, we
also maintain a long-term Neutral recommendation on the
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