By Dan Fitzpatrick and Christina Rexrode
Wells Fargo & Co. showed that lending to consumers and
businesses can be more lucrative than being a big name on Wall
Street, upstaging J.P. Morgan Chase & Co. with its
first-quarter results.
The San Francisco bank reported a 14% rise in net income, while
J.P. Morgan, based in New York and the U.S.'s largest bank by
assets, suffered a 19% profit decline from last year's first
quarter.
Friday's earnings reports included a fall in revenue at both
giant banks as they struggled with the prolonged mortgage downturn.
J.P. Morgan also was hit by its outsize clout on Wall Street, as
trading revenue dropped 17% to $5.1 billion. That hurt profits in
the company's investment-banking unit, which slid 24% to $1.98
billion.
In contrast, Wells Fargo, fourth-biggest in assets, benefited
from its focus as a lender to consumers and businesses. Total loans
at Wells Fargo rose 4% and were flat at J.P. Morgan.
"I cannot imagine a greater contrast between two sets of
quarterly results," said banking analyst Nancy Bush of NAB Research
LLC. Wells Fargo "continues to show why it is good not to be tied
so closely to capital markets."
Of the six largest U.S. financial institutions, only Wells Fargo
is expected to post a higher profit in the first quarter than it
did in the same period a year earlier, according to analyst
estimates collected by Thomson Reuters. The same trading slump that
hurt J.P. Morgan is also expected to bruise results next week at
Bank of America Corp., Citigroup Inc. and Goldman Sachs Group
Inc.
Wells Fargo's ascension punctuates the industry upheaval that
resulted from the financial crisis. Before 2008, Wells Fargo was a
regional institution on the West Coast known for purposely avoiding
attention and for a cross-selling strategy of offering customers
additional products and services.
"I think there were banks that were trying to grow for size,"
said former Wells Fargo CEO Paul Hazen, who left that role in 1998
and stayed as chairman until 2001. "We're a pretty mundane
bank."
Wells Fargo's shares rose 0.8%, to $48.08, in 4 p.m. New York
Stock Exchange composite trading, the only big bank to post a gain
amid a broadly lower market. J.P. Morgan's shares dipped 3.7%, to
$55.30.
So far this year, Wells Fargo's stock price is up nearly 6%,
while J.P. Morgan is down more than 5%.
The rise in earnings for Wells Fargo is the latest in a string
of triumphs for a company founded in 1852 amid the California gold
rush. It still uses a horse-drawn stagecoach as its corporate
logo.
Last year, Wells Fargo posted the highest net income of any U.S.
bank, and its banking unit surpassed Citigroup's to become
third-largest in assets behind J.P. Morgan Chase and Bank of
America, according to federal data. In November, Wells Fargo became
the largest bank in the world as measured by stock-market value,
according to SNL Financial. Wells Fargo is now within striking
distance of eclipsing Citigroup's all-time U.S. record set in
2006.
"If we just had good earnings for the quarter, it would be one
thing," Wells Fargo Chief Financial Officer Timothy Sloan said.
"But if you look back since the crisis, for the last five years
we've been growing earnings. At some point, you have to start
running out of luck and it's got to be based on something
else."
Even though Wells Fargo has a smaller presence on Wall Street
than J.P. Morgan, J.P. Morgan Chairman and Chief Executive Officer
James Dimon told investors in February that he expects Wells Fargo
to evolve into a major rival within five years.
"Wells Fargo will be in our business," Mr. Dimon said at the
bank's annual Investor Day in February. "I have enormous respect
for them."
He assured analysts on Friday that J.P. Morgan isn't losing any
customers because of recent legal woes, noting that "clients vote
with their feet and they seem to be coming to our branches and our
bankers."
Wells Fargo's overreliance on U.S. consumers could still
backfire amid a sharp falloff in mortgage lending, a key source of
profits.
Wells Fargo made $36 billion in mortgages in the first quarter,
down 67% from a year earlier and the smallest quarterly total since
at least 2008. In its search for new business, Wells Fargo has been
lowering minimum credit-score requirements for certain borrowers
and pushing into higher-end "jumbo" home loans.
Wells Fargo's small presence on Wall Street and outside the U.S.
could cause the firm to miss out on profits if the global economy
accelerates and provides new momentum for J.P. Morgan and other
large rivals. For now, though, Wells Fargo is "kind of fitting this
nice groove," said Ken Usdin, a banking analyst with Jefferies
Group LLC.
In 2008, Wells Fargo outmaneuvered Citigroup to buy troubled
Charlotte, N.C., lender Wachovia Corp., giving Wells Fargo its
first retail branches in nine Southern and Eastern states,
including New York. Citigroup, in turn, needed a $45 billion U.S.
rescue and soon began shrinking its global footprint.
Since then, Wells Fargo and J.P. Morgan have emerged as two of
the sturdiest large U.S. banks, while Citigroup and Bank of America
have struggled.
Legal troubles in 2012 and 2013 tripped up J.P. Morgan, which
agreed to more than $20 billion in payouts as it resolved a number
of government probes and lawsuits. Some of the cases involved
mistakes made by the firms J.P. Morgan scooped up during the
crisis: securities firm Bear Stearns Cos. and Washington Mutual
Inc.
J.P. Morgan didn't admit to any criminal wrongdoing as part of
the settlements.
Wells Fargo has avoided such quagmires, largely because many of
the loans it inherited from Wachovia weren't been bundled into
mortgage securities and resold to investors, a process that formed
the basis of multiple lawsuits for other banks once those
securities went bad.
It also benefited from its decision to stockpile reserves for
bad loans after it bought Wachovia.
"The Wachovia portfolio turned out to be better than we had
thought," Wells Fargo Chairman and CEO John Stumpf told analysts
Friday. Wells Fargo's first-quarter results also got a boost from a
tax gain and from setting aside less than J.P. Morgan for future
losses.
Saabira Chaudhuri contributed to this article.
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