By Saabira Chaudhuri and Christina Rexrode
Wells Fargo & Co. on Friday posted a 14% rise in net income,
as cost cutting and a drop in set-asides for bad loans offset a
sharp falloff in its mortgage business.
It was the bank's 15th straight quarter of year-over-year
earnings-per-share growth, according to data from FactSet. Wells
Fargo shares rose almost 2 % as the broader market fell.
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, rose to $1.05 from
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.
While some noted that results were driven by one-off items such
as tax benefits, the results diverged from those of rival J.P.
Morgan Chase & Co., which earlier on Friday reported results
that disappointed investors and sent its stock down about 3.5% in
morning trading.
"At the end of earnings season, Wells Fargo will end up looking
like one of the better" bank reports among its peers, said
Jefferies analyst Ken Usdin.
Though both J.P. Morgan and Wells suffered plunges in their
mortgage businesses, J.P. Morgan overall set aside more money for
potential troubled loans. J.P. Morgan also suffered from its
dependence on capital-markets businesses, while Wells Fargo's
plain-vanilla lending approach held up better.
Still, as the biggest U.S. mortgage lender, Wells Fargo is a
bellwether for the rest of the industry, and business there looks
weak. The bank funded just $36 billion worth of mortgages in the
three-month period, down 67% from $109 billion year ago. Mortgage
originations at J.P. Morgan, the second-largest U.S. mortgage
lender, fell 68% to $17 billion.
Mortgage refinancings, which propelled the earnings of both
Wells Fargo and J.P. Morgan in recent years, have slowed as
interest rates have risen, taking away homeowners' main incentive
to restructure their mortgage obligations.
Wells Fargo has worked to cut expenses in its mortgage business
more quickly than demand falls. In response to the mortgage
slowdown, Wells Fargo has cut roughly 9,000 jobs since July,
including at least 6,200 layoffs announced in the mortgage
unit.
Smaller banks are also getting more competitive in the mortgage
business, eating into the market share of bigger rivals. Wells
Fargo now controls about 19% of U.S. mortgage lending, according to
Inside Mortgage Finance, down from more than 30% at its peak in
2012.
To be sure, Wells Fargo has indicated that it is more interested
in keeping the mortgage business profitable than driving market
share. To that end, the banks are competing on service and types of
products, rather than cutting prices, said Guy Cecala, publisher of
Inside Mortgage Financing. He noted, for example, an offer Wells
Fargo introduced last year where it accepts 15% down payment on
jumbo mortgages, rather than the typical 20% or more.
Mortgage-servicing income, where the bank makes money by
processing paperwork from borrowers, also rose. Cost cutting and
improved credit quality also played a big role in the first-quarter
results.
Wells Fargo's 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.
Wells Fargo's 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.
Improving credit, which indicates banks are less concerned about
bad loans, 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.
Some analysts raised concerns about the results in Wells Fargo's
core business. Citigroup Inc. analyst Keith Horowitz told clients
that results were largely driven by one-time gains, "and we did not
see any signs of significant improvement on underlying core
results."
Loan growth at Wells Fargo--a key revenue driver for any retail
bank--showed signs of slowing. Total loans rose by $4.2 billion
from the fourth quarter to $826.4 billion, compared with growth of
$13.5 billion from the third quarter to the fourth.
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, tumble 10 basis points in 2013.
Write to Saabira Chaudhuri at saabira.chaudhuri@wsj.com
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