UPDATE 2-Wells Fargo profit rises but mortgage banking income falls

Fri Oct 11, 2013 10:12am EDT

Oct 11 (Reuters) - Profit at Wells Fargo & Co rose by a better-than-expected 13 percent in the third quarter, as the largest U.S. mortgage lender made up for a decline in that business by releasing a large chunk of money it had set aside for bad loans.

Home refinancings, which had boosted profits at Wells Fargo, the fourth-largest U.S. bank, over the past few quarters, slowed as anticipated, and many of its 89 other businesses did not improve enough to pick up the slack.

An improving economy meant more people paid their bills and the bank was able to release $900 million of reserves for credit losses, its largest since the second quarter of 2011. Lower write-offs of bad loans and lower personnel expenses also boosted profits, it said on Friday.

Net income applicable to common shareholders rose to $5.32 billion, or 99 cents per share, from $4.72 billion, or 88 cents per share, a year earlier. Analysts, on average, estimated Wells Fargo would earn 97 cents per share, according to Thomson Reuters I/B/E/S.

Wells Fargo shares were down 1.3 percent at $40.89 in early trading.

The bank made $80 billion in home loans, down from $139 billion a year earlier. That marked the smallest amount of mortgages that Wells Fargo extended since the second quarter of 2011, when it made $64 billion. It also ended a streak of seven consecutive quarters making over $100 billion in home loans.

Mortgage banking income fell 43 percent to $1.61 billion due to fewer loans as well as diminished profit from selling mortgages to investors. Within the business, income from collecting payments on mortgages rose by over $300 million to $507 million, while income from the business of making new loans fell by $1.5 billion to $1.1 billion.

The profitability of selling mortgages fell to 1.42 percent from 2.21 percent in both the third quarter of 2012 and the second quarter of 2013. The bank had expected the margin to fall to about 1.5 percent.

Rising interest rates crimped customer demand for mortgages throughout the quarter. In early September, applications to refinance home loans fell to their lowest level since November 2008.

For the week ended Sept. 27, 30-year mortgage rates fell to 4.49 percent from 4.8 percent in the week ended Aug. 23, after the U.S. Federal Reserve opted not to curtail its bond-buying program on Sept. 18, but there was little sign that Wells Fargo would immediately benefit.

The bank had $35 billion in mortgage applications that it had received but not yet processed at quarter-end, compared with $63 billion at the end of the second quarter.

Higher revenues from other businesses helped to offset some of the decline in mortgage banking. Trust and investment fees rose to $3.28 billion from $2.95 billion a year earlier.

Wells Fargo's net interest margin, a measure of how profitable its loans are, fell to 3.38 percent from 3.66 percent in the same quarter last year and 3.46 percent in the second quarter. An increase in deposits and long-term debt was responsible for 75 percent of the decrease from the prior quarter.

Total revenue dipped to $20.5 billion from $21.2 billion a year earlier, meaning that the higher profits were achieved though cost savings and reserve releases.

The bank announced layoffs of about 5,300 employees in its mortgage operation throughout the third quarter.

Earlier Friday, JPMorgan Chase & Co posted its first quarterly loss under Chief Executive Jamie Dimon after a tangle of legal and regulatory probes cost the biggest U.S. bank $7.2 billion. (Editing by Dan Wilchins and Jeffrey Benkoe)