The fourth-largest U.S. bank by assets said cost cuts, and dipping
into money it had set aside to cover bad loans, helped it post a
record profit even though revenue fell 6 percent, as fewer consumers
refinanced home loans due to higher mortgage rates.
Indeed, residential mortgage lending volume was at its lowest since
the fourth quarter of 2008, during the financial crisis. Wells Fargo
made $50 billion of residential mortgage loans in the quarter, less
than half the $125 billion of the same period a year earlier, and
down from $80 billion in the third quarter.
Chief Financial Officer Tim Sloan said on a conference call Tuesday
that the bank expects mortgage volume to continue to fall in the
first quarter of 2014, though not as much as in the third and final
quarters of 2013.
Across the industry, applications for mortgage refinancing dropped
by nearly a third between the end of September and the end of
December, according to the Mortgage Bankers Association.
At the end of December, Wells Fargo had $25 billion of mortgage
applications that it had not yet processed, down from $35 billion at
the end of the third quarter.
Wells Fargo's shares were down 0.9 percent at $45.12 in morning
trading on the New York Stock Exchange.
The bank had made more than one in five U.S. home loans in the first
half of 2013, according to industry publication Inside Mortgage
Net income applicable to common shareholders increased to $5.37
billion, or $1.00 per share, from $4.86 billion, or 91 cents per
share, a year earlier, the San Francisco-based bank said on Tuesday.
Analysts, on average, had expected earnings of 98 cents per share,
according to Thomson Reuters I/B/E/S.
Expenses in the bank's home loan unit fell after it cut 6,200
positions in the second half of 2013. Those severance costs mostly
impacted the bank's third quarter results.
The lower personnel expenses pushed its efficiency ratio, or its
expenses relative to its revenue, to 58.5 percent and into its
targeted range of 55 percent to 59 percent.
Net income also got a boost from the bank releasing $600 million
from its loss reserves, or money it had previously set aside to
cover bad loans.
That was more than double the $250 million released in the
year-earlier quarter but less than the $900 million released in the
Wells Fargo had $9.9 billion of revenue from fees in the fourth
quarter, down 13 percent from the same period a year earlier, due to
the decline in home lending. The bank's total interest income was
$11.8 billion, in line with the fourth quarter of 2012.
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The bank continued to experience historically low loan losses with a
net charge-off rate of 0.47 percent, down from 0.48 in the third
quarter and 1.05 percent a year earlier.
Chief Executive John Stumpf said at a December investor
conference that the loss rate of 0.47 percent was the lowest he had
seen in his 38-year career.
Total lending grew to $825.8 billion from $812.3 billion at the end
of the third quarter and $799.6 billion in the fourth quarter of
2012. The increase was driven by foreign and commercial lending as
well as the retention of more residential mortgages on its balance
The bank's net interest margin, a measure of the profitability of
its loans, fell to 3.26 percent from 3.56 a year earlier and 3.38 in
the third quarter.
Wells Fargo is one of the few large U.S. banks to emerge from the
financial crisis in a much stronger position, thanks in part to its
acquisition of Wachovia, which closed just over five years ago.
Many of the old Wachovia businesses performed well in the quarter.
The bank's wealth, brokerage and retirement group earned $491
million, a 39.9 percent increase from the same period a year earlier
and 9 percent from the third quarter.
Investment banking, another addition from the Wachovia acquisition,
increased its market share to 5.6 percent at year-end from 5.0
percent in 2012 as revenue from existing Wells Fargo wholesale
banking customers increased 16 percent.
Wells Fargo's stock jumped 28.7 percent in 2013, but lagged the 34.3
percent increase in the KBW index of bank stocks <.BKX>. The company
had a market value of $243.2 billion at the end of the year, making
it the largest U.S. bank by that measure.
JPMorgan Chase & Co <JPM.N> also reported a better-than-expected
adjusted quarterly profit on Tuesday as the biggest U.S. bank kept a
lid on costs and set aside less money to cover bad loans.
(Reporting by Anil D'Silva in Bangalore
and Peter Rudegeair in New York; editing by Ted Kerr and Bernadette
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