SAN FRANCISCO/NEW YORK Wells Fargo & Co (WFC.N), the fourth-largest U.S. bank, posted a decline in revenue, and its shares fell 4.1 percent as a bank known for outsmarting rivals turned in an average performance.
Net income rose 50.5 percent, but the gains reported on Wednesday were driven mainly by setting aside less money to cover bad loans. The bank's loan book shrank as outstanding loans to consumers declined and loans to companies did not grow enough to compensate.
Credit quality improved for the bank, as it did for rivals, but investors are less clear about where future profit growth will come from.
"It's a simple issue of their revenue being weak and their earnings before taxes and provisions being down significantly. I think that's why the stock is down," said Keith Davis, an analyst at Farr, Miller & Washington, with $730 million under management.
Wells Fargo was one of the biggest mortgage lenders in the United States in the years leading up to the housing crisis and managed to stay profitable during all but two quarters during the financial crunch.
Warren Buffett's Berkshire Hathaway (BRKa.N) (BRKb.N) has long invested in the bank because of the strength of its retail franchise and its skill at selling multiple products to customers.
Some investors and analysts now wonder if Wells Fargo's edge is disappearing.
"There is some concern that the future profitability of the mortgage banking business may not be what it has been in the past," said Nancy Bush, banking analyst at NAB Research LLC in Annandale, New Jersey and a contributing editor to SNL Financial, a financial industry newsletter. "That is a big issue for them."
Wells Fargo ended down 4.1 percent at $28.83 by the close of Wednesday trading on the New York Stock Exchange.
"They're becoming more like every other bank," one hedge fund manager said after the results.
The bank's first-quarter net income for common stockholders rose to $3.57 billion, or 67 cents per share, from $2.37 billion, or 45 cents per share, a year earlier. Revenue fell 5 percent to $20.33 billion.
Analysts, on average, had expected Wells Fargo earnings of 66 cents per share, according to Thomson Reuters I/B/E/S.
Wells Fargo cut the amount of money it set aside for bad loans to $2.21 billion from $5.33 billion a year earlier. It also released $1 billion, pre-tax, from its reserves.
Other major banks, including JPMorgan Chase & Co (JPM.N) and Bank of America Corp (BAC.N), have also boosted profit by setting aside less money to cover bad loans. Analysts said cutting loan loss provisions can provide near-term earnings boosts, but only loan growth can lift profits in the longer term.
The outlook for the economy, which will ultimately drive that growth, remains uncertain, Wells Fargo Chief Financial Officer Tim Sloan said in an interview.
"You've got consumers getting good economic information one week and then another week it's not as good. There's a lot for the consumer to be concerned about, for certain," Sloan said.
"The primary driver for the housing industry is the economy and jobs," he said.
Net income in Wells Fargo's community banking business, which includes retail banking for consumers and small businesses, as well as mortgage and home equity loans, increased to $2.18 billion from $1.42 billion while revenue fell to $12.64 billion from $13.96 billion, mainly due to lower mortgage banking income and lower deposit service charges.
Wells Fargo is one of the 14 lenders to have settled with U.S. bank regulators over claims that they mismanaged paperwork and may have improperly foreclosed on homes. The banks have agreed to compensate borrowers who were wrongly foreclosed upon, to overhaul their mortgage operations, and undergo an independent review of their 2009 and 2010 foreclosures, with money penalties still to be decided.
WEALTH MANAGEMENT PROFIT UP
In Wells Fargo's wealth, brokerage and retirement division, net income rose 20 percent to $339 million from $282 million as revenue increased 8.2 percent to $3.15 billion from $2.91 billion.
The business, which sells retirement products and securities to retail customers and provides services to the ultra-wealthy, accounted for about 16 percent of total Wells Fargo revenue, roughly the same as a year earlier.
Client assets in the retail brokerage unit, which includes Wells Fargo Advisors, rose 5 percent to $1.2 trillion.
The business plans to increase efforts to target clients from other parts of the firm. the bank has 5.2 million affluent customers who have $1.7 trillion of investments with competitors, according to a slide accompanying Wednesday's earnings presentation.
Wells Fargo sold an average of 9.82 products to customers of the wealth management business in the first quarter, up from 9.67 products, CFO Sloan said. The potential for more cross-selling is great, he added.
"Having a diversified model is really, really beneficial," Sloan said.
Net income in Wells Fargo's wholesale banking business, which includes loans to mid-sized and large companies and investment banking, rose to $1.65 billion from 1.24 billion as revenue increased to $5.46 billion from $5.42 billion.
(Reporting by Philipp Gollner in San Francisco and Clare Baldwin in New York; Additional reporting by Dan Wilchins and Helen Kearney in New York and Joe Rauch in Charlotte; Editing by John Wallace, Tim Dobbyn, Dave Zimmerman)