By Saabira Chaudhuri
Wells Fargo & Co. on Friday posted a 14% rise in net income,
handily beating analyst estimates, as a continued slowdown in the
bank's lucrative mortgage business was offset by better expense
controls and stronger credit quality.
Shares rose 1% in recent premarket trading.
Wells reported net income of $5.89 billion, compared with
year-earlier income of $5.17 billion. Per-share earnings,
reflecting the payment of preferred dividends, were $1.05 versus 92
cents a year earlier. Revenue declined 3% to $20.63 billion.
Analysts polled by Thomson Reuters expected per-share earnings
of 97 cents on revenue of $20.6 billion.
The results come after rival J.P. Morgan Chase & Co. earlier
Friday reported results that disappointed investors and sent its
stock down about 3% in premarket trading.
As the largest U.S. mortgage lender, Wells Fargo is viewed as a
bellwether for the U.S. housing market. In the first quarter, Wells
Fargo reported its home lending originations amounted to just $36
billion, compared with the $109 billion reported a year earlier and
$50 billion in the prior quarter. While Wells Fargo and other large
commercial banks have seen mortgage originations squeezed, the bank
has a significant share in funding home purchases, an area that
held up better than refinancing businesses. Mortgage banking
noninterest income totaled $1.51 billion, down 46% from a year
earlier.
J.P. Morgan's results showed mortgage loan originations down 68%
from the prior year, and mortgage banking profit of$114 million,
down by $559 million from the prior year.
Wells Fargo in February said it would lower its minimum credit
score for certain mortgages eligible for government backing, a move
that analysts expect to see more of as U.S. banks look for new
business amid lower refinancing volumes and more stable home
prices.
Ahead of Wells Fargo's earnings report, analysts at Alliance
Bernstein said they expect the bank benefit from prior
mortgage-related head count reductions as lagging severance costs
fade. In response to the mortgage slowdown, Wells Fargo has cut
roughly 7,000 jobs since July.
For the first quarter, Wells Fargo reported its noninterest
expense dropped 3.6% to $11.95 billion from $12.4 billion a year
ago. The drop was driven largely by declines in commission and
incentive compensation along with employee benefits expense.
Improving credit has bolstered financial results at banks across
the industry, although many analysts expect that benefit to slow, a
trend shown in rival J.P. Morgan's results earlier Friday.
Still, at Wells Fargo, the first-quarter reserve release rose to
$500 million from $200 million a year earlier. Banks generally
release reserves as credit conditions improve and they perceive
less of a need to hold reserves against potential loan losses.
Meanwhile, Wells Fargo's credit-loss provisions totaled $325
million, compared with $1.22 billion a year earlier.
Results from Wells Fargo--which along with J.P. Morgan--kick off
the first-quarter reporting season for large U.S. banks, are
closely watched as being indicative of what's to come from rivals.
As in recent quarters, banks are expected to be battered by both
weak trading revenue and slumping mortgage lending.
Wells Fargo--which recently surpassed J.P. Morgan as the U.S.
bank with the highest annual profit--is also the only large U.S.
bank for which analysts raised their earnings forecasts for the
quarter. Analysts had expected the bank to post a profit greater
than the same quarter a year ago, thanks in part to cost cuts and
its relatively small trading business.
The quarter's results weren't all sunny however. Loan growth at
Wells Fargo--a key revenue driver for any retail bank--showed signs
of slowing. Total loans rose by $4.2 billion sequentially to $826.4
billion, compared with sequential growth of $13.5 billion in the
fourth quarter.
Meanwhile, Wells Fargo's net interest margin was down at 3.20%,
compared with 3.49% a year earlier and 3.27% in the prior quarter.
The San Francisco bank has one of the highest net interest margins
in the industry, yet it saw that metric, an important measure of
lending profitability, slide 0.10 percentage points in 2013.
Christina Rexrode contributed to this article.
Write to Saabira Chaudhuri at saabira.chaudhuri@wsj.com
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