Shannon Stapleton/ReutersA branch of Wells Fargo in New York.
2:15 p.m. | Updated
At the height of the financial crisis, the mortgage business was a millstone for the banking industry. Today, it is a profit center.
Wells Fargo on Friday reported $4.9 billion of profit in the third quarter, a 22 percent jump largely led by a booming mortgage business.
The San Francisco-based bank continues to churn out record profits, with 11 straight quarters of net income gains. The results of 88 cents a share narrowly beat the estimates of analysts polled by Thomson Reuters, who forecast earnings of 87 cents a share.
The bank increased revenue as well, sidestepping a common sore spot that has plagued most all of the nation’s biggest banks. Wells Fargo recorded $21.2 billion in revenue, which surpassed the $19.6 billion figure from a year earlier but was slightly below expectations.
The bank’s lending division drove the growth, as consumers refinanced their mortgages amid record low interest rates. Wells Fargo, the nation’s largest mortgage lender, snared $188 billion in home mortgage applications, an 11 percent jump from the third quarter of 2011.
But the bank’s chief financial officer, Tim Sloan, underscored that “it’s more than just the mortgage business.”
The strong results, he noted, were spread across the bank. The wealth management unit improved. So did the sales and trading business.
“We just have the great benefit of this diversified model,” Mr. Sloan said in an interview.
But investors weren’t fully impressed. By mid-afternoon, the bank’s shares were down more than 3 percent, reflecting concerns about net interest margin, an important measure of the bank’s investment moves. The metric declined in part because the bank’s own investments suffered from the low-interest rate environment.
Wells Fargo, along with JPMorgan Chase, kicked off bank earnings season on Friday. The nation’s other big banks, including Goldman Sachs and Bank of America, will report their results next week.
The Wells Fargo story line – that a deep lending effort breeds success – is rooted in broad federal stimulus efforts that have propped up the mortgage industry. A Treasury Department initiative is spurring refinancing activity. And the Federal Reserve has introduced a long-term plan to buy large batches of mortgage-backed bonds, which should help keep rates low.
Wells Fargo, more than five years after the mortgage crisis, has seized the opportunity. The bank now creates roughly a third of all mortgages in the country. Total outstanding loans jumped slightly in the third quarter to $783 billion while the bank’s home mortgage originations soared 56 percent to $139 billion.
The demand for credit came largely from refinancing, which accounted for 72 percent of all home loan applications. The Treasury program produced 14 percent of the mortgage volume.
Like other big banks, Wells Fargo makes home loans before turning around to sell most of them to investors after attaching a government guarantee. Those gains totaled $2.61 billion in the third quarter, up 225 percent from $803 million in the third quarter of last year.
The refinancing boom is fueling profits. Wells Fargo’s profit in the community banking division, which includes Wells Fargo’s retail branches and mortgage business, climbed 18 percent to $2.7 billion.
Despite the gains, the mortgage crisis continues to haunt Wells Fargo. The bank this summer agreed to pay $175 million to settle Justice Department accusations that it discriminated against certain minority homeowners from 2004 to 2009. Wells Fargo, which denied the charges, was also sued this week by federal prosecutors in New York, who said the bank defrauded the government and lied about the quality of the mortgages it handled under a federal housing program.
Still, the legal troubles will barely nick the bank’s bottom line.
Like JPMorgan, Wells is experiencing growth beyond mortgages. Wholesale banking, which includes the sales and trading business along with the corporate lending division, increased its profit by 11 percent to $1.9 billion. While the unit operates in the shadow of the Wall Street investment banks, Wells Fargo has gradually extended its reach in that area.
“There are a lot of underlying positives that will continue to drive the earnings of this company,” said Ed Najarian, a senior bank analyst at ISI, a New York research firm.
Peter Eavis contributed reporting.
Article source: http://dealbook.nytimes.com/2012/10/12/wells-fargo-posts-earnings-of-4-9-billion-up-22/?partner=rss&emc=rss
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