July 13 (Bloomberg) -- Wells Fargo & Co., the most valuable U.S. bank and largest home lender, reported second-quarter profit increased 17 percent on strength in mortgage banking and a drop in expenses.
Net income advanced to a record $4.62 billion, or 82 cents a share, from $3.95 billion, or 70 cents, a year earlier, the San Francisco-based company said today in a statement. Income before taxes and provisions climbed, and the shares posted their best gain in four months.
Chief Executive Officer John Stumpf, 58, countered record-low interest rates and narrower margins with more home lending and purchases of loan portfolios from European banks. Wells Fargo creates a third of all U.S. mortgages and said today that new applications set a quarterly record.
“Wells did the best job of the big players in the mortgage market and therefore they’ve garnered a share as the other fellows have fallen by the wayside,” billionaire Warren Buffett said today on Bloomberg Television’s “In the Loop With Betty Liu.” Buffett’s Berkshire Hathaway Inc. is the bank’s biggest stakeholder with more than 7 percent of the common stock, according to data compiled by Bloomberg.
Wells Fargo rose 3.2 percent to $33.91 at 4:15 p.m. in New York trading. The stock gained 23 percent this year, compared with 17 percent for the 24-company KBW Bank Index, and ranked as the largest U.S. lender by market value at $180 billion.
Revenue increased 4 percent to $21.3 billion from a year earlier, while slipping 1.6 percent from the first quarter. The net interest margin held steady in the period from the first three months of this year at 3.91 percent.
Results were aided by a $400 million release of loan-loss reserves, the bank said. Income before taxes and provisions, a measure that helps filter out one-time items and focus on operations, advanced 12 percent from a year earlier and almost 3 percent from the first quarter.
Wells Fargo updated its target for planned expense cuts, saying it won’t be able to get quarterly costs below $11.25 billion due to increased revenue opportunities, according to the statement. The company, in comments from Chief Financial Officer Timothy J. Sloan, said its efficiency ratio is a better gauge of expense management.
Credit performance improved, Chief Risk Officer Mike Loughlin said in the statement. “We expect continued but more modest improvement for the remainder of the year, and we continue to expect future reserve releases in 2012,” he said.
Mortgage banking income climbed to $2.89 billion, a 79 percent increase from last year’s second quarter and up $23 million from the first quarter, according to the company.
The bank set aside almost $670 million to cover repurchase demands, an increase of almost $240 million over the first quarter. Wells Fargo cited more demands for refunds on loans sold to government-sponsored entities from 2006 through 2008. Fannie Mae and Freddie Mac typically have the right to “put back” mortgages if defects are later discovered in data about borrowers and properties that backed the loans.
Nationwide home loan originations in the U.S. probably climbed 28 percent in the second quarter from a year earlier to $372 billion, according to estimates from the Washington-based Mortgage Bankers Association. About three-fourths of those were refinancings, the MBA estimates.
Wells Fargo has been among the most active U.S. banks buying loan portfolios and businesses from distressed European lenders. The company agreed to purchase Germany’s WestLB AG’s subscription-financing business and about $3 billion in loans, according to a June 25 statement.
The yield on the company’s securities portfolio climbed to 4.32 percent from 4.19 percent in the first quarter as lower-yielding mortgage securities were replaced with higher paying municipal bonds and other debt. Wells Fargo had $9.5 billion in unrealized gains on the portfolio at the end of June.
Banks are searching for revenue growth as record-low interest rates cut into margins and an unemployment rate above 8 percent puts a damper on new credit. The U.S. Treasury 10-year note yielded 1.44 percent intraday on June 1, the lowest on record, according to data compiled by Bloomberg.
“Low interest rates continue to be one of the biggest fundamental headwinds facing banks today,” FBR Capital Markets Corp. analyst Paul Miller wrote in a July 9 report.
Net interest margins, the difference between what banks make on loans and pay for funds, have been squeezed by falling rates and slack demand among borrowers. The 25 largest U.S. commercial banks held $4.09 trillion in loans and leases on June 27, a 0.6 percent gain over March, according to the Federal Reserve.
Mortgage banking and commercial-and-industrial lending have shown strength. C&I loans at the 25 biggest lenders climbed 3.7 percent over the first quarter to $772.2 billion in the week ended June 27, according the Fed.
“We like WFC as best in breed,” Miller wrote, referring to the company by its stock ticker. Firms with strong mortgage-banking income will outperform competitors this quarter, Miller wrote.
Wells Fargo does relatively little business in Europe compared with larger peers such as JPMorgan Chase & Co., the biggest U.S. bank by assets, and Citigroup Inc., ranked third.
Wells Fargo agreed this week to pay $125 million and set up a $50 million assistance fund to settle U.S. allegations that it discriminated against minority borrowers. Sloan said the company has already set aside funds to cover the cost. The bank will also stop using outside brokers to create mortgages in efforts to ensure compliance, the bank said.
To contact the editors responsible for this story: David Scheer at email@example.com.