Wells Fargo Posts Record Net Income as Fewer Loans Default
Wells Fargo & Co., the most profitable U.S. bank in 2013, posted a 14% rise in first-quarter earnings as fewer customers missed loan payments.
Net income advanced to $5.89 billion, or $1.05 a share, from $5.17 billion, or 92 cents, a year earlier, the San Francisco-based company said today in a statement, marking the 12th consecutive record quarter. While the results beat Wall Street estimates, revenue fell 3% and profit was down 2% before changes in taxes and reserve levels.
Wells Fargo's $21.9 billion of net income last year surpassed JPMorgan Chase & Co., its largest U.S. rival by assets. Those profits helped boost capital at Wells Fargo, which ranks first in market value and home lending. Chief Executive Officer John Stumpf gained clearance last month to raise the quarterly dividend after passing Federal Reserve stress tests.
"Revenue remained relatively stable despite the impact of fewer days in the quarter, reflecting contributions from our diversified sources of fee revenue," Chief Financial Officer Tim Sloan said in the statement.
Results were helped by a $423 million tax benefit, and the company released $500 million of loan-loss reserves. Banks typically reclaim money put aside in earlier years as the economy improves and borrowers become less prone to default.
Without help from such special items, core revenue dropped more than expenses, according to Keith Horowitz, an analyst at Citigroup Inc.
"Despite the headline beat, we do not see the stock outperforming today since the beat was driven by one-timers and we did not see any signs of significant improvement on underlying core results," Horowitz wrote in a note to clients.
The stock advanced 26 cents to $47.97 at 9:49 a.m. in New York. The shares rose 5.1% this year through yesterday, outpacing the 0.6% drop for 24 lenders in the KBW Bank Index.
The efficiency ratio, which measures management's ability to control costs, improved to 57.9% from 58.5% in last year's fourth quarter, the bank said. The net interest margin, a gauge of profitability, fell to 3.2% from 3.27% in the preceding three months.
Within the business segments, community banking profit rose 31% from the year earlier. Wealth, brokerage and retirement advanced 41% and wholesale banking fell 15%. Mortgage originations slumped 28% from the fourth quarter to $36 billion.
"They have done a great job sticking to their knitting, which is old-fashioned relationship banking," Andrew Marquardt, an analyst at New York-based Evercore Partners Inc., said before the results were announced. "Credit should continue to do better." He has a hold recommendation on the stock.
Banks have struggled to raise revenue with interest rates near historic lows and demand cooling for U.S. home loans. Nationwide, mortgage originations declined 57% in the first quarter from a year earlier, according to the Mortgage Bankers Association.
Wells Fargo trimmed staff as originations dropped, announcing another 1,100 job cuts in the first quarter, according to a slide show presentation. That's on top of more than 6,000 announced last year. About two-thirds of the quarter's mortgages were for new-home purchases as opposed to refinancings, reversing last year's first quarter, the bank said.
Originations accounted for about 6% of Wells Fargo's fee revenue in the latest quarter compared with 25% a year earlier, company presentations show. The bank has said the business of servicing mortgages, where it also ranks No. 1, softens the drop in originations as people stay in homes longer. Servicers earn fees from mortgage investors for handling bills, collections and foreclosures.
Mortgage banking income, which includes both origination and servicing, fell 46% to $1.51 billion, and applications continued to decline. JPMorgan posted a pretax loss on mortgage production and said it expects a full-year deficit from that business.
Wells Fargo's 2014 capital plan passed the Fed's annual review, which is designed to prevent banks from failing and bringing down the financial system. The company set plans to raise its quarterly dividend to 35 cents from 30 cents and buy back 350 million additional shares.