3rd Wells Fargo 1Q Profit Up 13% On Strong Mortgage Banking
First Published Friday, 13th April 2012 06:04 pm - © 2012 Dow Jones
--Wells Fargo first-quarter profit boosted by mortgage banking
--CEO says housing market approaching a "tipping point"
--Wells Fargo will have more reserve releases in future quarters, CFO says
--Wells Fargo core loan growth slowed
(Adds CFO comments in paragraphs 3 and 12-13.)
By Brett Philbin
Of Dow Jones NEWSWIRES
NEW YORK -(Dow Jones)- Wells Fargo & Co.'s (WFC) first-quarter profit rose 13% as the giant bank was bolstered by a surge in mortgage banking, and company executives expressed confidence the housing market is approaching a turning point.
The San Francisco-based bank, the nation's largest mortgage lender, originated $129 billion of mortgages in the first quarter, up from $120 billion in the fourth quarter and $84 billion a year earlier.
Like rival J.P. Morgan Chase & Co. (JPM), performance in Wells Fargo's mortgage business was fueled, in part, by government homeowner assistance measures as 15% of its originations in the quarter were from the Home Affordable Refinance Program, or HARP.
Wells Fargo, which has benefited from a pullback in mortgage activity from rivals such as Bank of America Corp. (BAC), posted $2.9 billion in mortgage banking noninterest income, up 42% from $2 billion in the year-earlier period.
The bank also experienced a big jump in mortgage applications, which rose 20% from the fourth quarter, as refinancings accounted for 76% of that total.
During a conference call with analysts, Wells Fargo Chairman and Chief Executive John Stumpf signaled the bank's mortgage business continues to improve, noting that "when you have the dynamics of higher rental rates and lower home values at attractive financing rates, there's a point in time where the market is going to clear."
"I think were getting very close to that tipping point. We have a pretty good pipeline," he added.
Overall, Wells Fargo posted a profit of $4.25 billion in the first quarter, up from a year-earlier profit of $3.76 billion. Per-share earnings, reflecting the payment of preferred dividends, rose to 75 cents from 67 cents a year ago, topping the 73 cents expected by analysts polled by Thomson Reuters.
Revenue increased 6.4% to $21.64 billion, the company's highest revenue in nine quarters. Analysts were looking for $20.51 billion.
With a smaller capital markets business than its big bank peers, the West Coast-based bank is more closely watched in the investment community for its mortgage banking results. The bank, though, also set aside $430 million for mortgage loan repurchase losses, up from $404 million in the prior period.
Wells Fargo, the nation's fourth-largest bank by assets, joined rival J.P. Morgan Chase & Co. (JPM), in kicking off bank earnings season Friday morning and in beating analysts' estimates.
In an interview, Chief Financial Officer Timothy Sloan said Wells Fargo would likely continue to report earnings in the first of the two weeks that big banks traditionally disclose results.
He said, "there is an element of us wanting to tell our story without having a lot of the other banks report first."
Shares of Wells Fargo fell 2.2% to $33.27, though, amid a weaker stock market on Friday. The stock has climbed 20% year-to-date.
Wells Fargo again set aside less money for future potential loan losses as the bank released $400 million in reserves, down from $600 million in the fourth quarter. On the call, Sloan said Wells Fargo expects to have additional reserve releases in future quarters.
In its lending business, Wells Fargo's loan growth appeared to slow though, as its core loans grew just 0.1% from the prior period as the bank said it experienced "seasonally lower credit card balances, a decline in commercial real estate, and continued runoff in the home equity portfolio." Excluding an expected $4.1 billion run-off in Wells Fargo's nonstrategic/liquidating portfolio, the firm said loans in the core portfolio grew by $984 million.
On the call, Stumpf expressed confidence in Wells Fargo's ability to grow the portfolio organically as well as from an acquisition standpoint. In the first quarter, the firm said it would buy BNP Paribas SA's (BNP.FR) North American energy-lending business, which includes $3.9 billion of loans outstanding.
Wells Fargo's net interest margin, the profitability measure in lending, fell to 3.91% from 4.05% in the prior year but increased slightly from 3.89% in the prior quarter.
Net charge-offs, or loans lenders don't think are collectible, fell to 1.25% of average loans from 1.73% a year earlier and 1.36% in the fourth quarter.
Wells Fargo's expenses rose to $13 billion in the quarter, up from $12.5 billion in the fourth quarter as the bank had higher personnel costs, but it also booked $314 million in litigation expenses for various legal matters.
The bank also said it expects non interest expenses to decline $500 million to $700 million in the second quarter as it eliminates merger costs related to the integration of Wachovia Corp., which it acquired three years ago.
Credit-loss provisions for Wells Fargo totaled $2 billion, down from $2.21 billion a year earlier and $2.04 billion in the fourth quarter.
-By Brett Philbin, Dow Jones Newswires; 212-416-2173; email@example.com
--Matthias Rieker and Mia Lamar contributed to this article.