Wells Fargo Posts Profit Gain as Stumpf Leans on Reserves

Wells Fargo & Co., the largest U.S. home lender, sought to assure investors its other businesses can make up for flagging mortgage sales after posting a 13 percent gain in profit that partly relied on tapping loan-loss reserves.

Net income advanced in the third quarter to a record $5.58 billion, or 99 cents a share, from $4.94 billion, or 88 cents, a year earlier, the San Francisco-based company said today in a statement. The bank reclaimed $900 million from loan-loss reserves while mortgage banking revenue plunged 43 percent.

Chief Executive Officer John Stumpf, 60, added to the bank’s three-year string of record profits, outlasting its biggest rival as JPMorgan Chase & Co. posted a $380 million loss. Stumpf also told investors he’ll seek approval to raise the dividend. Still, the bank predicted home lending will slide again in the fourth quarter, prompting analysts to ask whether the company can fill the void and produce profit gains.

“How do you mind the gap?” Mike Mayo, an analyst at CLSA Ltd., said on the conference call. “It seems like the answer this quarter was partly reserve releases, which equaled over one-tenth of your earnings for the quarter.”

Diverse Units

Wells Fargo has cited the diversity and sheer number of about 90 different businesses it runs as evidence it can overcome underperformance at any one unit. While Stumpf has stopped short of pointing analysts to specific operations, today’s statement showed credit cards, personal credit management and retail sales finance recorded double-digit revenue growth from a year earlier.

“I know there was a little frustration because everybody wants one business to point to,” Chief Financial Officer Timothy Sloan said in a phone interview. “I wouldn’t think of Wells Fargo as a mortgage company, I would think about it as a diversified financial institution,” he said. “Because of that diversification, we don’t have to say, ‘Oh, mortgage is down, so credit-card, you have to pick up the slack.’ Everybody’s going to pick up the slack.”

Wells Fargo shares were little changed at $41.43 in New York as the 24-company KBW Bank Index rose 0.4 percent. The lender’s stock climbed 21 percent this year through yesterday, trailing the 23 percent gain for the KBW benchmark.

Cost Target

The bank reported declines in revenue, lending margins and the backlog of new mortgage loans. The efficiency ratio, which measures costs as a percentage of revenue, rose to 59.1 percent, missing the firm’s target of 55 percent to 59 percent. Noninterest expenses were little changed at $12.1 billion.

Revenue fell 3 percent to $20.5 billion. Profit before taxes and loss provisions, which some analysts use to gauge the bank’s core performance, declined 8 percent to $8.38 billion. Net interest margin, the difference between what a bank makes on lending and what it pays for funding, fell to 3.38 percent, a 0.08 percentage point drop from the second quarter.

Sloan said expenses will fall back to within the bank’s target range in the fourth quarter, and Stumpf said a higher dividend and share buybacks will be included when the bank submits its new capital plan to federal regulators. He’s raised the dividend twice this year.

Wells Fargo made $1.61 billion from mortgage banking, 43 percent less than a year earlier. The mortgage business run by Mike Heid originated $80 billion in new home loans during the quarter. Pending mortgages plunged to $35 billion from $63 billion in the second quarter.

Mortgage Loans

Sloan, 53, told analysts last month that mortgage originations and profit margins on selling home loans would fall in the third quarter. Borrowers were discouraged as interest rates rose amid speculation that the Federal Reserve would pare its efforts to stimulate the economy with low rates.

Wells Fargo, which has been expanding a securities unit under John Shrewsberry after acquiring it in the purchase of Wachovia Corp., took in $397 million in investment-banking fees, a 33 percent increase from a year earlier. Trading revenue fell 25 percent over the year ago to $397 million.

The community banking division, which includes the retail-bank unit led by Carrie Tolstedt and consumer-lending business headed by Avid Modjtabai, booked $3.34 billion in net income, a 22 percent increase over the year earlier. Profit in the wealth unit run by David Carroll rose 33 percent to $450 million, while net income in the wholesale banking unit run by David Hoyt fell 1 percent to $1.97 billion.

Refinancing Wanes

Ten-year Treasury yields, which are used to set rates for some consumer loans including mortgages, rose from this year’s low of 1.63 percent on May 2 to 3 percent on Sept. 5. Mortgage refinancing applications, which accounted for 82 percent of all requests for home loans last year, made up 63 percent in the third quarter, according to data compiled by the Mortgage Bankers Association.

The company said in July 2011 it would take out $1.5 billion in quarterly costs, then backtracked a year later to pursue higher mortgage revenue. The bank has since renewed the effort as home borrowing waned, announcing at least two rounds of job cuts totaling more than 4,800 workers. Another 500 cuts were also announced, according to a presentation today.

Wells Fargo employed about 274,000 people at midyear, the largest workforce among domestic lenders.

U.S. banks are still facing fallout from bad loans made before the housing crash. Wells Fargo announced Sept. 30 it had agreed to an $869 million settlement with Freddie Mac to resolve disputes over loans sold to the government-backed firm before Jan. 1, 2009. Within days, the bank was sued by New York state Attorney General Eric Schneiderman over claims the lender didn’t uphold terms of a $25 billion mortgage-servicing settlement in February 2012.

Analysts’ View

Out of 42 analysts who cover the stock, 19 gave the equivalent of a buy rating through Oct. 10, according to data compiled by Bloomberg. It’s the fourth straight month the percentage stood below 46 percent. Before that, the tally hadn’t dropped below 48 percent since the month ending Oct. 14, 2009, when the equivalent of two out of five analysts recommended buying the stock.

Bank of America Corp., Citigroup Inc., Morgan Stanley and Goldman Sachs Group Inc. are set to release results next week.

Most of the largest U.S. banks are still struggling to show increased revenue amid still-narrowing lending margins, borrowers cutting debt levels and weak volumes in bond-trading. The six largest U.S. lenders probably will report revenue of $100.9 billion for the quarter, a 3.4 percent decline from a year earlier, according to analysts’ estimates compiled by Bloomberg through Oct. 7.

Wells Fargo has countered the lack of growth by buying loan portfolios from other banks and investing in securities with higher yields. The firm agreed in August to buy commercial property loans from ING Real Estate Finance (USA) LLC with balances of $1.6 billion.

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