October 11, 2013 / 12:38 PM / 6 years ago

Wells Fargo profit rises but investors worry about growth

(Reuters) - Profit at Wells Fargo & Co (WFC.N) rose by a better-than-expected 13 percent in the third quarter, as the largest U.S. mortgage lender made up for a decline in that business by releasing a large chunk of money set aside for bad loans.

A woman walks past teller machines at a Wells Fargo bank in San Francisco, California October 10, 2013. REUTERS/Robert Galbraith

Home refinancings, which had been a profit center over the past few quarters for the No. 4 U.S. bank, slowed as anticipated, and many of its 89 other businesses did not improve enough to make up the difference. Both interest and fee income fell slightly from year-earlier levels.

An improving economy meant more people paid their bills and the bank was able to release $900 million of reserves for credit losses, its largest since the second quarter of 2011.

But some investors worried whether Wells Fargo can overcome the slowdown in mortgage activity after the release of reserves runs its course.

“At some point, the reserve releases drop away, mortgage becomes a very bland business, and growth has to happen” from other parts of the bank, said Chris Richey, portfolio manager and managing director at Neosho Capital, a $165 million investment firm that holds Wells Fargo shares.

“They’ve got their work cut out for them,” Richey said.

Wells Fargo executives believe that despite the drop-off in mortgage activity, underlying economic trends will enable most of their businesses to grow.

“The improvement in housing is really good for America, good for our customers and ultimately good for our company,” Chief Executive John Stumpf said on a conference call with analysts.

He said household debt levels were at their lowest since 2002, “which provides capacity for consumer spending and borrowing going forward.”

Wells Fargo stock dipped 0.6 percent to $41.18, recouping most of its losses from earlier in the session.

Separately on Friday, JPMorgan Chase & Co (JPM.N) posted its first quarterly loss under Chief Executive Jamie Dimon after a tangle of legal and regulatory probes cost the biggest U.S. bank $7.2 billion.


Wells Fargo’s net income applicable to common shareholders rose to $5.32 billion, or 99 cents per share, from $4.72 billion, or 88 cents per share, a year earlier. Analysts, on average, estimated Wells Fargo would earn 97 cents per share, according to Thomson Reuters I/B/E/S.

Total revenue dipped to $20.5 billion from $21.2 billion a year earlier.

Mortgage banking income fell 43 percent to $1.61 billion due to fewer loans as well as diminished profit from selling mortgages to investors.

Wells Fargo’s mortgage business is in a “transitional period,” Chief Financial Officer Tim Sloan told analysts on the conference call, adding that mortgage volumes in the fourth quarter were likely to be lower.

The San Francisco bank made $80 billion in home loans, down from $139 billion a year earlier and ending a streak of seven consecutive quarters making over $100 billion in home loans.

Rising interest rates crimped customer demand for mortgages throughout the quarter. In early September, applications to refinance home loans fell to their lowest level since November 2008.

For the week ended September 27, 30-year mortgage rates fell to 4.49 percent from 4.8 percent in the week ended August 23, after the U.S. Federal Reserve opted not to curtail its bond-buying program on September 18, but there was little sign that Wells Fargo would immediately benefit.

The bank had $35 billion in mortgage applications that it had received but not yet processed at quarter-end, compared with $63 billion at the end of the second quarter.


Higher revenues from other businesses helped to pick up some of the slack from mortgage banking. Trust and investment fees rose to $3.28 billion from $2.95 billion a year earlier. Investment banking fees jumped 33 percent from the same period a year earlier.

The bank also increased its loan book by 1.3 percent to $812.3 billion from the second quarter.

The increase was broad-based, with nearly $5 billion coming from growth in commercial, auto and credit card loans, and $5.2 billion from acquisitions of commercial real estate loans from European banks.

Wells Fargo’s net interest margin, a measure of how profitable its loans are, fell to 3.38 percent from 3.66 percent in the same quarter last year.

“Cosmetically, the quarter looked weaker,” given the share of the bank’s profit connected to reserve releases, said Marty Mosby, an equity analyst at investment bank Guggenheim Securities.

“It’s one of those transition quarters. As you move into the next quarter or two, you’ll see temporary earnings being replaced” with more stable sources, Mosby said.

Editing by Dan Wilchins and Jeffrey Benkoe

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