Wells Fargo & Co., the largest U.S. home lender, reported a 13 percent rise in first-quarter profit, setting a record as the bank made more money on new mortgages and curbed losses from old ones.
Net income rose to $4.25 billion, or 75 cents a share, from $3.76 billion, or 67 cents, a year earlier, the San Francisco-based firm said in a statement today. While results beat the 73-cent consensus of analysts, they included a $400 million release from reserves and the company said expenses for this year may be at the high end of its forecast. The shares dropped 2.5 percent in New York.
The new guidance is “not a big change, but it is in the wrong direction and thus takes away hopes of upside,” Brian Foran, a New York-based analyst at Nomura Holdings Inc., wrote in a note to clients.
Chief Executive Officer John Stumpf, 58, is taking advantage of weakness among rivals at home and abroad by expanding U.S. mortgage lending and buying assets from European banks. Thirteen straight quarters of profit made Wells Fargo the most valuable U.S. bank by market capitalization and allowed Stumpf to raise the dividend 83 percent and buy back shares.
“Mortgage lending is extremely important for strategists as well as Wells Fargo investors,” Jeffrey Davis, chief investment officer at Lee Munder Capital Group in Boston, said today in an interview on Bloomberg Television. “All in all, we’re happy with what we see. It confirms what we think about Wells Fargo.”
Revenue and Costs
The stock slid 86 cents to $33.16 at 9:40 a.m. in New York. The shares gained 23.4 percent this year through yesterday, compared with 23.6 percent for the KBW Bank Index. Berkshire Hathaway Inc., the investment and holding company run by Chairman and CEO Warren Buffett, is the biggest Wells Fargo shareholder with a stake of about 7.3 percent.
Revenue climbed 6.4 percent to $21.6 billion, more than the $20.4 billion forecast by analysts. Costs also advanced, with non-interest expense climbing about 2 percent to $13 billion amid higher compensation and legal spending.
The bank said quarterly costs will fall to $11.25 billion by the end of the year, the high end of Stumpf’s stated goal for reducing expenses to between $10.75 billion and $11.25 billion. Costs will fall by as much as $700 million in the second quarter, the company said.
Wells Fargo set aside $430 million to cover costs of buying back soured loans from investors, compared with $404 million in the fourth quarter. The total provision for credit losses dropped 10 percent to $2 billion, the bank said. Income before taxes and provisions, a measure that filters out the effect of one-time items, advanced 7 percent from the fourth quarter and 14 percent from a year earlier, according to the statement.
The bank said mortgage originations climbed 7.5 percent from the three months ended December. The unclosed pipeline stood at $79 billion at the end of the quarter, increasing from $72 billion at year-end. Mortgage origination and sales accounted for 24 percent of all fee revenue, according to a presentation.
The mortgage industry got a boost from a recently enacted federal refinancing program, according to analysts including FBR Capital Markets’ Paul Miller. The expansion of the Home Affordable Refinance Program, dubbed HARP 2.0, lowers fees for homeowners and allows them to refinance regardless of how much their home’s value has fallen.
“This quarter should be one of the strongest quarters for mortgage banking we have seen in quite some time,” Miller, a former examiner for the Federal Reserve Bank of Philadelphia, wrote in an April 10 report for the Arlington, Virginia-based firm. “We continue to recommend investors stick with banks that have sizable mortgage banking operations.” Miller assigns an “outperform” rating to the shares, with a $39 price target over the next 12 months.
Wells Fargo originated 30.1 percent of all U.S. mortgages in the fourth quarter, the highest share ever posted by a single lender and nearly three times the nearest competitor, according to Guy Cecala, publisher of Inside Mortgage Finance, an industry publication.
Drags on the company include slack national demand for loans at the biggest U.S. banks. Loans at the top 25 domestically chartered commercial lenders rose 0.4 percent in the quarter through March 28, slowing from 1 percent in the previous three months, according to the Federal Reserve.
Non-performing assets climbed for the first time in at least four quarters to $26.6 billion. The pickup was spurred by new regulatory guidance on how to account for second mortgages, which added $1.7 billion to the pool of soured assets.
Net interest margin, the difference between what the bank earns on loans and pays for funds, widened to 3.91 percent from 3.89 percent in the fourth quarter.