By Julie Steinberg, Saabira Chaudhuri and Emily Glazer
Wells Fargo & Co.'s third-quarter results disappointed
investors as the bank again saw a key measure of lending
profitability narrow and expenses climbed.
Shares fell about 1.7% as earnings met the expectations of
analysts polled by Thomson Reuters.
Wells Fargo reported net income of $5.73 billion, compared with
year-earlier profit of $5.58 billion. Per-share earnings,
reflecting the payment of preferred dividends, were $1.02 versus 99
cents a year earlier. The quarter marked the 17th consecutive
period of year-over-year profit growth, according to FactSet.
Revenue increased 3.6% to $21.21 billion. Analysts polled by
Thomson Reuters expected per-share earnings of $1.02 on revenue of
$21.08 billion.
The largest U.S. bank by market capitalization has focused on
generating revenue from its bread-and-butter businesses of
commercial and consumer lending as rivals pulled away from some of
those businesses after the financial crisis. Never a big trading
firm, Wells Fargo has avoided big losses and the worst of the
regulatory penalties plaguing the industry. It is still on the hook
for mortgage litigation, however.
"There's no question the global regulatory community keeps
adding onto both capital and liquidity requirements that are going
to have the combined effect of changing business models, increasing
operating costs and financing costs ... and equity," Chief
Financial Officer John Shrewsberry said.
Chief Executive John Stumpf added that Wells Fargo doesn't have
the same limitations as other, more global banks because 97% of its
revenues come from the U.S.
But Wells Fargo's net interest margin--a key profitability
figure that measures the difference between what a bank makes on
lending and what it pays depositors--had continued to disappoint
investors, despite an uptick in loan growth. In the third quarter,
the margin narrowed to 3.06% compared with 3.39% a year earlier and
3.15% in the prior quarter.
Mr. Shrewsberry said in a Tuesday interview the bank is most
focused on customers and accounts. While it is always seeking
opportunities to make loans, lower interest rates have led the bank
to continue holding cash, which it can afford, he said.
"As long as deposits are growing faster than loans, [lower NIM]
will be a trend that we're seeing," Mr. Shrewsberry said. There are
"certain situations where it just makes more sense from a credit
perspective or interest-rate risk perspective to hold it in cash
rather than quickly redeploy excess deposits to a yield that's the
same or higher than average earning on balance sheet."
Lending remained a bright spot for Wells Fargo. Total loans grew
3.7% from a year ago to $838.9 billion.
Wells Fargo's mortgage banking results are closely watched,
since as the largest U.S. mortgage lender, the bank is viewed as a
bellwether for the U.S. housing market. A slump in refinancing in
recent quarters has outweighed any gains in new purchases.
Wells Fargo reported its home lending originations came in at
$48 billion, down sharply from the $80 billion reported a year
earlier but up a hair from the $47 billion reported for the prior
quarter. Mortgage banking noninterest income totaled $1.63 billion,
up 1.2% from a year earlier.
Mr. Stumpf said the housing market still isn't "fully
recovered." It is held back due to slower household formations and
higher national student debt balances, leaving less money available
to spend on mortgages, he said. Other factors include less
available inventory, especially in coastal areas, and lack of
attainable credit for many qualified borrowers, he added.
Mr. Stumpf also reiterated the bank is still communicating with
regulators on questions surrounding mortgage repurchase risk. If
the bank doesn't underwrite properly it should be held accountable,
but if a default happens later and is due to a technical issue
unrelated to the payment ability of the customer, the risk should
transfer, he said.
He said the bank is working with community groups, other
originators, the Mortgage Bankers Association and government
agencies including the Federal Housing Finance Agency and the
Federal Reserve. Mr. Shrewsberry added in an interview that matters
have improved with Fannie Mae and Freddie Mac, but that there's
still work to be done with the Federal Housing Administration.
Wells Fargo's huge consumer lending business outside of
mortgages has been growing relatively quickly, but some have
questioned whether lending standards have dropped too far. Auto
loans, one area that has generated scrutiny of late, jumped 11%
from a year earlier to $55.2 billion. Mr. Stumpf said August was
one of the largest auto lending sales months for the bank in
years.
Keefe, Bruyette & Woods analyst Chris Mutascio noted that
large venture capital gains and a lower-than-expected tax rate
juiced Wells Fargo's earnings in the third quarter. "The quality of
earnings is lower than we expected," he said.
During the quarter, Wells Fargo saw expenses move higher.
Noninterest expense rose to $12.25 billion from $12.10 billion a
year ago and from $12.19 billion in the second quarter. Wells and
other banks have been closely focused on cutting expenses as
sluggish revenue growth makes it harder to report strong profits.
Mr. Shrewsberry said the bank is spending more on compliance and
risk management while working to cut spending on matters including
consolidating office locations, third-party purchasing contracts
and technology costs. Wells Fargo had more than 100 million square
feet across the U.S. since its completed merger with Wachovia Corp.
in early 2009 to around 90 million square feet currently, he said,
adding that there could be another 10 million square feet to cut in
the future.
Credit quality provided less of a boost for the bank than it has
in recent quarters. Reserve releases fell to $300 million from $900
million a year earlier and $500 million in the prior quarter. Banks
generally release reserves as credit conditions improve and they
perceive less need to hold reserves against potential loan
losses.
Meanwhile, Wells Fargo's credit-loss provisions totaled $368
million, compared with $75 million a year earlier and $217 million
in the prior quarter.
Write to Julie Steinberg at julie.steinberg@wsj.com, Saabira
Chaudhuri at saabira.chaudhuri@wsj.com and Emily Glazer at
emily.glazer@wsj.com
Corrections & Amplifications
Total loans at Wells Fargo grew 3.7% from a year ago. An earlier
version of this article incorrectly said total loans grew 3.4%.
(Oct. 14, 2014)
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