Wells Fargo CFO comfortable with mortgage risk

NEW YORK (Reuters) - Wells Fargo & Co. (WFC.N) has been largely insulated from troubles afflicting many smaller U.S. mortgage lenders. Its chief financial officer calls that a recipe to pick up market share.

"People are still taking out loans to buy or refinance a home," Howard Atkins, the CFO, said in an interview. "In times of turmoil, business tends to flow to the strongest providers, of which we're one."

The second-largest U.S. mortgage lender, which is also the fifth-largest bank, posted its usual double-digit gain in quarterly profit on Tuesday.

First-quarter net income rose 11 percent to a record $2.24 billion, or 66 cents per share, topping analyst forecasts.

Results benefited from a 90 percent jump in mortgage banking revenue. Applications rose 19 percent to $113 billion and residential mortgage volume rose 3 percent to $68 billion.

The Mortgage Bankers Association last month projected that industrywide loan volume would fall 9 percent this year.

Credit losses rose 65 percent to $715 million from low year-earlier levels and the bank wrote off $124 million to reflect a lower value for some riskier loans it holds or services. Commercial lending, however, grew 11 percent.

"Wells Fargo deserves a premium valuation based on such strong financial performance," wrote Gary Townsend, a Friedman, Billings, Ramsey & Co. analyst, following results. He rates the bank "outperform."

The shares of San Francisco-based Wells Fargo have escaped much of the carnage afflicting subprime lenders, which make home loans to people with poor credit histories.

The shares trade at 13 times expected 2007 profit. That is above the 9 multiple under which larger rival Countrywide Financial Corp. CFC.N labors.

Since early February, Countrywide shares are down about 20 percent, while Wells Fargo is down just 1 percent. The shares of many smaller lenders are down far more.

"We are a responsible lender," Atkins said. "We try to make sure we bring people into loans only if they can afford them."

MERGERS UNLIKELY

Many U.S. mortgage lenders have struggled in the last year as home price appreciation slowed, defaults rose, and investors grew fearful of buying lower-quality mortgages.

Dozens of subprime lenders have quit the industry or gone bankrupt, including New Century Financial Corp. NEWC.PK.

Wells Fargo said it escapes some industry pressures for a few reasons.

The bank does not make some riskier loans, including loans that let homeowners pay less than principal and interest due.

It also "co-issues" roughly two-thirds of its subprime loans, meaning it passes credit risks to investment banks that package the loans into securities.

"The so-called subprime market is still going through an adjustment," Atkins said. "(Some) investors are looking for opportunities to buy and others are shying away."

Subprime lenders such as Accredited Home Lenders Holding Co. LEND.O and Fremont General Corp. FMT.N have been selling some of their loans to investors.

Many businesses including Accredited, Fremont's residential loan unit, NovaStar Financial Inc. NFI.N and H&R Block Inc.'s (HRB.N) Option One Mortgage Corp. unit may be sold.

Wells Fargo will not likely be a buyer.

"As far as the origination side is concerned, we'll continue to focus on organic growth," Atkins said. "Acquisitions would not be high on the list."