* Bank posts quarterly profit of $4.9 billion
* Tops analysts' estimates on EPS, misses on revenue
* Net interest margin falls on low rates
By Rick Rothacker and Jed Horowitz
Oct 12 Wells Fargo & Co's third-quarter
profit jumped 22 percent as the largest U.S. mortgage lender
benefited from a surge in home loan refinancings.
The No. 4 U.S. bank by assets has expanded in mortgage
lending while others such as Bank of America Corp have
pulled back. It said it expects the lending boom to continue as
the housing market shows signs of recovery and borrowers take
advantage of low interest rates pushed by the Federal Reserve.
"It feels like it is going to last at least a few quarters
and obviously we hope it does," Chief Financial Officer Tim
Sloan told analysts in a conference call.
Wells reported third-quarter earnings per share of 88 cents,
topping analysts' consensus estimate of 87 cents, as compiled by
Thomson Reuters I/B/E/S. But the bank missed revenue estimates
and a key banking measure dropped more than expected, sending
its shares down in New York Stock Exchange trading.
Net interest margin - the spread between what the bank pays
on deposits and earns on loans - fell to 3.66 percent from 3.91
percent in the second quarter, a bigger drop than it warned of
Banks are experiencing shrinking margins as older loans with
higher interest rates are paid down and they find fewer places
to invest growing deposits.
"The margin came in much worse than we expected, but
mortgage banking was better," Keefe, Bruyette & Woods analyst
Frederick Cannon wrote in a note to clients. "Overall, this was
a slight beat this quarter, but the margin matters more."
Wells Fargo executives urged investors to focus on the
bank's overall profit rather than the shrinking margin. Chief
Executive John Stumpf said the bank is also rapidly boosting fee
income by selling products and services that do not depend on
interest rates for loans.
"Overall revenue is up 8 percent this year," Stumpf said,
while deposit growth is strong and bad loans and other expenses
are declining. "Those are pretty good numbers."
Sloan said the bank's net interest margin could remain under
pressure through next year.
The bank reported record net income of $4.9 billion on total
revenue of $21.2 billion on the same day that JPMorgan Chase &
Co also reported results to kick off the bank earnings
season. JPMorgan, the largest U.S. bank, said profits rose 34
percent to a record $5.71 billion.
Wells shares were off 3.2 percent at $34.05 in afternoon
trading on the New York Stock Exchange. The KBW Bank Index
of large banks, which includes Wells Fargo, was off 2.8
HOLDING ONTO MORTGAGES
Wells Fargo has emerged from the financial crisis as the
dominant U.S. mortgage lender, making about one in three U.S.
home loans and tripling the volume of its closest competitor,
In the quarter, Wells wrote $139 billion in mortgages versus
$89 billion a year ago, but up only slightly from $131 billion
in the second quarter. The bank's decision to stop making loans
through brokers cost it about $8 billion in volume, Sloan said
in an interview.
The bank typically sells most of the loans it makes to
investors such as Fannie Mae and Freddie Mac
. But this quarter, executives decided to hold onto
$9.8 billion in loans that were eligible to be sold to the
mortgage finance companies.
The move cost the bank about $200 million in fee income
during the quarter, but in the long run executives said the
loans would yield more than the mortgage-backed securities they
could have bought. The bank expects to add more mortgages to its
portfolio in the fourth quarter.
Sloan said the loans will not materially affect interest
rate or credit risk at the bank, given the size of its overall
loan portfolio. The bank can also sell the loans in the future
if it wants, he added.
While mortgages have boosted the bank's bottom line, they
have also produced some headaches.
The U.S. Attorney in Manhattan this week filed a lawsuit
accusing the bank of recklessly underwriting government-insured
home loans. The bank has denied the allegations. [ID:
The bank also continued to set aside more money to cover
investor demands to buy back soured mortgage loans it sold
during the housing boom. It added $462 million to those reserves
in the third quarter, down from $669 million in the second
quarter but up from $390 million a year ago.
TOTAL LOANS UP
Total loans increased by $7.4 billion, or about 1 percent,
from June 30, to $782.6 billion.
The additional $9.8 billion in mortgages that the bank held
instead of selling drove most of the increase. Wells Fargo also
had increases in auto, credit card, student and commercial
The executives touted improvements in credit quality. The
bank set aside less money for future loan losses than it charged
off in the third quarter - a sign it believes credit quality is
improving. Some of the third-quarter loan losses resulted from
new regulations that will not have an effect in future quarters.
Wells bought back 17 million shares of its own stock in the
quarter, plus an additional 9 million under a contract that
settles in the fourth quarter.
Stumpf said the bank is looking forward to the next round of
annual stress tests in which the bank can ask the Federal
Reserve for permission to increase share buy-backs and
Banks submit their capital plans in the first quarter.
"We are really focused on getting more capital back to our
stockholders," he said.