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Wells Fargo Slides as Low Rates Squeeze Third Qtr Margin

Wells Fargo & Co. signage is displayed in front of a bank branch in New York, on Oct. 10, 2012. Photographer: Peter Foley/Bloomberg
Wells Fargo & Co. signage is displayed in front of a bank branch in New York, on Oct. 10, 2012. Photographer: Peter Foley/Bloomberg

Wells Fargo & Co., the most valuable U.S. bank and largest mortgage lender, slid in New York trading after a record third-quarter profit was marred by narrower profit margins.

The bank fell 2.6 percent to $34.25 at 4 p.m. While record-low rates spurred homeowners to refinance, boosting the mortgage unit, that also curtailed interest income from the bank’s loans and other investments.

Chief Executive Officer John Stumpf, 59, has taken market share and reaped higher fees in U.S. mortgages, where the bank accounted for 1 in 3 home loans at midyear. Margins have been under pressure as older, higher-yielding investments expire, with Stumpf saying today he’d rather reinvest in shorter maturities that pay less to avoid losses if rates rise.

The decline in the net interest margin was “the big story for the quarter,” Scott Siefers, an analyst at Sandler O’Neill & Partners LP, wrote in a note today. “Investors are likely to focus on this worse-than-expected NIM performance, as well as management’s outlook for future periods.”

Profit rose 22 percent to $4.94 billion, or 88 cents a share, from $4.06 billion, or 72 cents, a year earlier, according to a statement from the San Francisco-based company.

Mortgage Banking

Mortgage banking helped offset a 0.25 percentage point decline in the net interest margin, the difference between what the bank makes on loans and pays for funds, to 3.66 percent, the company said. The margin was 3.91 percent at the end of June.

The drop was worse than guidance from Chief Financial Officer Timothy Sloan, who said Sept. 11 the third-quarter margin might narrow by about the same as last year’s 0.17 percentage point. The decline doesn’t represent what will happen in future quarters, Sloan said today during a conference call.

“We don’t think it makes sense on a short-term basis to grow either net interest income or the net interest margin just to be able to show growth in a specific quarter,” Sloan said in an interview. “What that generally means is you are taking on more credit risk or you’re taking on more duration risk.”

Sloan said he’s hopeful the bank can increase interest income in coming quarters.

“It will take continued economic growth,” he said. “It will take a lot of hard work and effort from our folks, as well as I’m hopeful that we’ll see some good opportunities from an acquisition standpoint.”

Higher Revenue

Revenue advanced 8.1 percent from a year earlier to $21.2 billion and was little changed from the second quarter. Mortgage banking income rose to $2.81 billion, up 53 percent from last year’s third quarter, according to the company. The total declined $86 million from the second quarter. Wells Fargo said guidance from regulators compelled the bank to write down the value of some performing consumer loans.

The company elected to keep $9.8 billion in mortgage originations on its balance sheet instead of selling them, a decision that meant forgoing about $200 million in fee income, the bank said. Total loans, which would have contracted without the added mortgages, climbed 1 percent over the second quarter to almost $783 billion.

Earlier in the day, JPMorgan Chase & Co., the biggest U.S. bank by assets, said third-quarter profit rose 34 percent to a record $5.71 billion as mortgage revenue soared 72 percent.

The average fixed rate on a 30-year mortgage fell to 3.38 percent Sept. 26, according to Nationwide originations probably climbed 33 percent in the third quarter from a year earlier to $412 billion, according to estimates from the Washington-based Mortgage Bankers Association.

Legal Costs

Mortgages have also brought U.S. banks more than $84 billion in costs tied to shoddy home loans and foreclosures since the start of 2007, according to data compiled by Bloomberg.

Wells Fargo was sued by the U.S. for hundreds of millions of dollars in damages this week over claims the bank made reckless mortgage loans that defaulted and caused losses for a federal insurance program. The conduct spanned more than a decade, according to a statement from U.S. Attorney Preet Bharara in Manhattan. Wells Fargo denied any wrongdoing and said it will vigorously defend itself.

Share Performance

Wells Fargo shares have gained 24 percent this year, bringing the firm’s market value to about $181 billion, the highest for any U.S.-based bank. Berkshire Hathaway Inc., run by billionaire Warren Buffett, is the biggest stockholder with more than 7 percent of the common shares, according to data compiled by Bloomberg.

Analysts and investors are looking for signs that banks will be able to produce a sustained and more diverse stream of revenue in a U.S. economy that’s expanding at less than 2 percent annually. The 25 largest commercial lenders held $4.13 trillion in loans and leases in the week ended Sept. 26, a 0.7 percent gain from the end of June, according to the Federal Reserve. Commercial and industrial loans climbed 3 percent over the same period to $794 billion, central bank data show.

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