Wells Fargo’s Cost Cuts Boost Income as Revenue Slips

Wells Fargo & Co., the largest U.S. home lender, said lower expenses helped the company post a record profit in the first quarter even as revenue dropped and lending margins narrowed.

Net income advanced 22 percent to a record $5.17 billion, or 92 cents a diluted share, from $4.25 billion, or 75 cents, a year earlier, according to a statement today from the San Francisco-based bank. While the results topped estimates from analysts surveyed by Bloomberg, new home loans and mortgage banking income weakened, and the shares slipped 2.3 percent in New York trading.

Chief Executive Officer John Stumpf has concentrated on reducing expenses as demand for corporate and consumer loans sputtered. Stumpf, 59, has been helped by waning costs tied to faulty mortgages and foreclosures as housing prices rebounded and has sought more revenue from the bank’s mortgage business, which originated almost 1 in 3 U.S. home loans last year.

“In an environment where revenues are under pressure, people want to see banks control expenses,” Jason Goldberg, a New York-based analyst with Barclays Plc, said in a phone interview before the results were announced. Wells Fargo “does have some levers” to pull, he said. Goldberg has a buy rating on Wells Fargo’s stock.

Revenue Drops

Revenue fell 1.7 percent to $21.3 billion, according to the bank. The net interest margin, which represents the gap between what banks pay depositors and what’s earned on loans, narrowed by 8 basis points from the fourth quarter to 3.48 percent.

Wells Fargo compensated by cutting noninterest expense 5 percent to $12.4 billion, and it released $200 million in reserves as loan losses eased.

Quarterly profit at the community-banking division, which includes the branch network and mortgage business, rose 25 percent to $2.92 billion from a year earlier. Net income in wholesale banking rose 9.5 percent to $2.05 billion, while earnings from the wealth and brokerage unit climbed 14 percent to $337 million.

Mortgage banking profit fell 3 percent to $2.79 billion as the firm kept $3.4 billion in conforming home loans instead of selling them, forgoing $112 million in revenue.

Wells Fargo may be vulnerable because it’s the dominant home lender and refinancing of mortgages is slowing, said Bert Ely, an independent banking consultant in Alexandria, Virginia, in an interview on Bloomberg Radio’s “Surveillance” with Tom Keene.

“A big question is at this point in time: to what extent is Wells a one-horse trick? And if and when refi activity drops off, is Wells going to continue to do well?” Mortgage originations fell 13 percent from the fourth quarter to $109 billion and applications -- a gauge of future results -- fell 7.9 percent to $140 billion, the bank said.

Higher Payouts

Investment banking fees climbed 37 percent from the year earlier to $353 million. It was the first time the lender broke out the results in a quarterly earnings statement after saying in its annual filing that it made $1.29 billion last year.

Wells Fargo has been building the securities business acquired in the rescue of Wachovia Corp. during the 2008 financial crisis. Stumpf has disclaimed any interest in displacing leading firms like JPMorgan Chase & Co. or Goldman Sachs Group Inc. from the top ranks, saying the bank is motivated merely by the needs of its customers.

The CEO has vowed to return more capital to shareholders, receiving approval to increase the quarterly dividend to 30 cents last month from 25 cents and promising more stock buybacks. The Federal Reserve approved Wells Fargo’s capital plan and the firm passed annual tests by the central bank to gauge the ability of U.S. lenders to weather an economic shock.

Stock Reacts

Wells Fargo declined 0.2 percent to $37.51 yesterday and slipped to $36.65 as of 9:35 a.m. in New York. The shares gained 9.7 percent this year through yesterday, trailing the 11 percent rise in the 24-company KBW Bank Index. Warren Buffett’s Berkshire Hathaway Inc. is the largest shareholder, with a stake of more than 8 percent, according to data compiled by Bloomberg.

The stock sells for about 1.8 times tangible book value, the firm’s theoretical liquidation price, compared with about 1.5 percent for commercial lenders in the KBW Bank Index.

“For investors looking at Wells Fargo, the revenue outlook is relatively more important,” said Richard Staite, a London-based analyst at Atlantic Equities LLP. “You need to see revenue growth to justify the slightly higher valuation.” Staite, who spoke before results were released, had a neutral rating on the stock and a $37 price target for 12 months.

JPMorgan, the biggest U.S. bank, said today that first-quarter profit rose 33 percent to an all-time high as improving consumer credit quality allowed the company to cut loan-loss reserves. While mortgage volume jumped 37 percent, mortgage-banking net income dropped 31 percent.