Wells Fargo Misses Estimates as Home Lending Weakens

Wells Fargo & Co., the largest U.S. home lender, posted a fourth-quarter profit that missed some analysts’ estimates as income from mortgage banking weakened.

Net income rose 21 percent to a record $3.41 billion, or 61 cents a diluted share, from $2.82 billion, or 8 cents, in the same period a year earlier, the San Francisco-based bank said today in a statement. Twenty-nine analysts surveyed by Bloomberg estimated profit of 63 cents. Profit for the full year advanced 1 percent to $12.4 billion.

“Refinancing activity slowed significantly in the quarter,” Anthony Polini, an analyst at Raymond James Financial Inc. in New York, wrote in a Jan. 12 note. “Mortgage banking revenue typically accounts for 10 to 12 percent of core revenue.”

Chief Executive Officer John Stumpf, 57, led Wells Fargo to the top spot in mortgage lending as the financial crisis drove competitors out of the business. The extra market share came with added scrutiny as state officials probed the industry’s foreclosure practices and concern mounted among investors that banks will be forced to buy back billions of dollars in faulty home loans, draining their reserves.

Foreclosure Risk

The lender may “face some risks related to the industry’s foreclosure and servicing issues and additional regulatory scrutiny,” John McDonald, a Sanford C. Bernstein & Co. analyst, wrote in a Jan. 7 report. The bank’s “exposure to mortgage repurchases is mitigated by its better underwriting standards pre-crisis.”

Wells Fargo was little changed as of 8:30 a.m. in early New York trading. The stock closed at $32.49 in New York Stock Exchange composite trading yesterday, a gain of 4.8 percent so far this year.

Total revenue declined 5 percent in the quarter to $21.5 billion, and income before taxes and provisions slid 17 percent to $8.15 billion. Wells Fargo released $850 million from reserves and told investors to expect more in the future.

Wells Fargo collected $2.8 billion in mortgage banking income, a drop of 19 percent from the same period of 2009. The bank reported $2.5 billion of mortgage banking income in the third quarter of 2010. Total loans increased less than 1 percent to $757.3 billion from $753.7 billion in the third quarter.

Refund Demands

McDonald estimates the lender may face another $2 billion in losses tied to so-called mortgage putbacks. Paul Miller, an analyst at FBR Capital Markets, estimates that repurchase losses at Wells Fargo may range from $3.1 billion to $5.3 billion, with $2.7 billion already taken as of his Nov. 29 report.

All 50 U.S. states are investigating whether banks and loan servicers used false documents and signatures to justify hundreds of thousands of foreclosures. Wells Fargo said in October that it would submit supplemental affidavits to courts in about 55,000 cases. The bank is the second-largest U.S. mortgage servicer after Bank of America Corp., according to industry newsletter Inside Mortgage Finance.

Among Wells Fargo’s biggest competitors, New York-based JPMorgan Chase & Co., the second-largest bank by assets, last week reported record quarterly profit of $4.83 billion, a 47 percent increase, which was boosted by a reduction in reserves. Citigroup Inc., also based in New York, posted a profit of $1.31 billion yesterday that missed analysts’ estimates.

Bank of America, the largest by assets in the U.S. and second-biggest home lender, plans to announce results on Jan. 21. It’s based in Charlotte, North Carolina.

Stock Performance

Wells Fargo, which briefly surpassed JPMorgan as the largest U.S. bank by market value during the quarter, has trailed the 24-company KBW Bank Index. Wells Fargo’s shares gained 15 percent in 2010, while the KBW index rose 22 percent.

In the last month, analysts for at least four firms, including Credit Suisse Group AG and Raymond James raised their target price for the stock by an average of $3.43. The average target of 26 analysts is $36.62.

Wells Fargo, which slashed its dividend to 5 cents a share from 34 cents in May 2009, may be one of the first banks allowed by regulators to raise its payout, analysts said.

Stumpf told a Goldman Sachs Group Inc. investor conference in December he was “in violent agreement” that an increase to the payout was necessary. The bank will announce an increase of the payout to 10 cents in April, analysts surveyed by Bloomberg estimate. It may also repurchase shares or retire its trust- preferred securities in the second half of this year, McDonald wrote.

To contact the reporter on this story: Dakin Campbell in San Francisco at dcampbell27@bloomberg.net

To contact the editor responsible for this story: David Scheer at dscheer@bloomberg.net

Press spacebar to pause and continue. Press esc to stop.

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.