(Corrects attribution of quote in 4th paragraph to CFO Tim
Sloan from CEO John Stumpf)
By Peter Rudegeair
July 12 The home loan business came through for
Wells Fargo & Co in the second quarter, helping the
biggest U.S. mortgage lender beat Wall Street's profit
expectations, despite fears that lending volume would drop as
Rising mortgage rates, driven by expectations that the U.S.
Federal Reserve will eventually cut back its economic stimulus
program, are expected to weigh on banks' mortgage business in
the coming months.
But Wells, the No. 4 U.S. bank by assets, has some 90
businesses, ranging from credit cards to small business loans,
that will benefit as the economy improves, the bank's top
executives said on Friday. The mortgage operations contributed
just 13 percent of the bank's more than $21 billion of revenues
in the latest quarter.
"The mortgage horse has been a big, strong horse. We've got
89 other horses that are going to be able to grow," Chief
Financial Officer Tim Sloan told analysts on a conference call,
referring to the stagecoach that has long been the symbol for
The bank's shares were up 1.5 percent to $42.51 in afternoon
trading on the New York Stock Exchange after touching a new
52-week high of $43.05 earlier in the session. The stock has
risen 21 percent this year, compared with a 25 percent rise in
the KBW index of bank stocks.
"With Wells Fargo, there were a lot of doubts from large
institutional investors who were shorting the shares leading
into earnings because of the 30-year (mortgage) rate
increasing," said Tom Jalics, a senior investment analyst with
Key Private Bank. "But it turns out the worry in investors'
heads about originations and refinancing falling off a cliff is
Thirty-year mortgage rates rose to 4.58 percent at the end
of the second quarter, up 0.82 percentage point from the first
The rise in mortgage rates since early May did slow down
home loan refinancing, which accounted for 56 percent of Wells
Fargo's mortgage applications in the second quarter, down from
nearly two-thirds in the first quarter.
But the bank's income from making home loans rose 9 percent
from a year earlier. Even Wells executives were not expecting
the business to hold up that well.
"We have continued to be surprised by how housing has
positively impacted our results," Sloan said on the conference
call. "Originations in the second quarter were a lot stronger
than I think anyone would have imagined."
That may not last long, possibly putting an end to Wells
Fargo's streak of seven consecutive quarters of making more than
$100 billion in home loans.
Overall, the San Francisco-based bank made $112 billion of
home loans in the latest quarter, down from $131 billion a year
earlier but up from $109 billion in the first quarter. Income
from mortgage lending totaled $2.41 billion.
Wells Fargo had a 22 percent share of the U.S. mortgage
market in the first quarter, down from 27.7 percent at the end
of the 2012 fourth quarter, according to Inside Mortgage
Finance, an industry publication.
JPMorgan Chase & Co, the second-biggest provider of
mortgages in the United States with an 11 percent market share,
also forecast a decline in the mortgage business in the coming
months. JPMorgan, the largest in the United States by assets,
reported a higher-than-expected 31 percent rise in quarterly
profit on Friday. Trading revenue rebounded and it set aside
less to cover bad loans.
The improving economy and recovering housing market helped
Wells Fargo in various ways in the second quarter. Profits got a
boost as the bank set aside less money to cover bad loans
Net income applicable to common stockholders rose to $5.27
billion, or 98 cents per share, from $4.40 billion, or 82 cents
per share, a year earlier.
Analysts' average forecast was 93 cents per share, according
to Thomson Reuters I/B/E/S. It was the bank's 14th consecutive
quarter of higher earnings per share.
(For a Wells Fargo earnings graphic, click on link.reuters.com/zyc69t)
The bank released $500 million in loan loss reserves in the
quarter, well above the $200 million released in the first
quarter, due to gains in house prices and fewer bad loans. The
bank's provision for bad loans fell 64 percent to $652 million.
The increase in rates made it attractive for the bank to add
to its investment portfolio by purchasing $21.1 billion in
securities in the quarter.
"That's a big increase from what we've done in prior
quarters," Sloan told Reuters in an interview, adding the bank
has also added $6 billion in securities to its portfolio since
the start of the third quarter.
The bank's net interest margin, an indicator of how
profitable its loans are, fell to 3.46 percent in the second
quarter from 3.91 percent a year earlier and 3.48 percent in the
Rising interest rates should ease pressure banks have faced
on their margins, but that trend will take time to bear fruit.
Wells Fargo's total second-quarter revenue rose marginally, to
$21.37 billion from $21.29 billion a year earlier.
Revenue from trust and investment fees, which accounted for
one-third of the bank's fee income, jumped to $3.5 billion, up
nearly $300 million from the first quarter. Investment banking
fees were up 85 percent from a year ago.
Non-interest expenses fell to $12.25 billion from $12.40
billion in the first quarter but were $250 million more than
analysts expected. The primary reason expenses did not fall
further was because revenue-based compensation was higher, Sloan
(Reporting by Peter Rudegeair in New York, additional reporting
by Tanya Agrawal in Bangalore; Editing by Ted Kerr, Paritosh
Bansal and John Wallace)