Wells Fargo & Co., the largest U.S. home lender, posted record fourth-quarter and full-year profit that was bolstered by expense cuts and one-time gains, raising concern among some analysts about the quality of the earnings.
Net income advanced 10 percent for the quarter to $5.61 billion, or $1 a share, from $5.09 billion, or 91 cents, a year earlier, the San Francisco-based company said today in a statement. The average estimate of 33 analysts surveyed by Bloomberg, excluding some items, was 98 cents a share. For the full year, profit rose 16 percent to $21.9 billion.
Chief Executive Officer John Stumpf, 60, is trimming staff and expenses as rising interest rates curtail demand for home refinancings. While Wells Fargo’s profit was enough to beat the consensus of Wall Street analysts, mortgage applications plunged and Oppenheimer & Co.’s Chris Kotowski told clients that results were helped by more than $1.2 billion from reserve releases and equity-investment gains.
“Wells is straining to make this,” Kotowski wrote in a note, which maintained a neutral rating on the stock. “Most of the line items were very close to expectations, though all modestly on the adverse side of expectations.”
Wells Fargo, ranked fourth by assets among U.S. lenders, advanced 3 cents to $45.59 at 4:15 p.m. in New York, even as the KBW Bank Index was rising 0.5 percent. The stock gained 33 percent last year, trailing the 35 percent rally for the 24-company KBW benchmark.
Revenue slid 6 percent in the quarter to $20.7 billion from a year earlier and 3 percent for the full year to $83.8 billion. Profit before taxes and provisions fell 5 percent.
Net interest margin, the difference between what the bank makes on lending and pays for funds, fell to 3.26 percent from 3.38 percent in the third quarter. Deposits and loans both increased.
Non-interest expense dropped 6 percent and the efficiency ratio, which measures costs as a percentage of revenue, improved to 58.5 percent from 59.1 percent in the third quarter and 58.8 percent a year earlier.
Profit rose in all three operating segments, with the greatest percentage gains coming in wealth, brokerage and retirement, the unit run by David Carroll.
At the consumer bank, mortgage originations fell to $50 billion, a 38 percent decline from the third quarter, and mortgage-banking income fell by almost half from year-earlier levels to $1.57 billion. Applications were down to $65 billion from $87 billion in the prior quarter as demand for refinancings slumped, and the pipeline of pending applications dropped to $25 billion at the quarter’s end from $35 billion as of Sept. 30.
“Our market share over the last couple of years was disproportionately high primarily because the biggest driver for origination volume until the last couple quarters was refinances,” Chief Financial Officer Timothy J. Sloan said on the earnings call, in response to an analyst’s question. “As we get to a more purchase-driven market, we actually think we’ve got a great opportunity to grow the business.”
Responding to analysts’ concerns about the quality of the bank’s earnings, Sloan said in an interview that equity gains were less than the prior year’s fourth quarter, while annual figures were in line with the prior year. Earnings improved over the third quarter even as the bank had a smaller reserve release, which shows the strength of other units, he said.
Mortgages also waned at JPMorgan Chase & Co., the biggest U.S. bank by assets and among the top home lenders, which said today annual profit dropped 16 percent to $17.9 billion. Applications fell by half from year-earlier levels and 23 percent from the previous quarter. Revenue from mortgage fees and related income fell 46 percent year-over-year to $1.09 billion.
Wells Fargo was responsible for about 1 in 5 U.S. mortgages last year and has profited from Federal Reserve policies that lowered rates and sparked a refinancing wave. As rates have risen, applications have slowed and cut into originations. Rates on 30-year mortgages averaged 4.51 percent last week, up from 3.35 percent in early May, according to Freddie Mac.
Bank of America Corp. and Citigroup Inc., the second- and third-largest U.S. banks, will report results later this week.
Stumpf announced 5,300 job cuts in the third quarter, and 925 more in October. The impact began to take effect in the fourth quarter, according to a Nov. 7 presentation and may reduce costs by as much as $750 million annually, Deutsche Bank AG analysts wrote in a Jan. 3 report. The entire staff shrank 2 percent for the quarter and year to 264,900, Wells Fargo said.