January 25, 2022

DealBook: Wells Fargo Earnings Rise 21%, to $4.1 Billion

Workers removed the last Wachovia sign outside a Wells Fargo bank center in Charlotte, N.C.Chris Keane/ReutersWorkers removed the last Wachovia sign outside a Wells Fargo bank center in Charlotte, N.C.

Wells Fargo, the nation’s largest consumer lender, reported Monday that its third-quarter earnings rose 21 percent, even as a drop in revenue marked a disappointing sign for the San-Francisco-based bank.

The bank turned a $4.1 billion profit in the third quarter, or 72 cents a share, boosted by gains in its lending and deposit division and its lack of exposure to the volatile investment banking business. That compared with a profit of $3.3 billion, or 60 cents a share, in the same period a year earlier. The figures, also aided by an $800 million release in reserves amid easing loan losses, fell just below the 73-cents-a-share consensus estimate of analysts.

The bottom line improvement was somewhat overshadowed by the lack of top-line growth. The bank’s revenue fell to $19.6 billion, from $20.9 billion, reflecting the banking industry’s broader struggles generating growth as the economic recovery stalls and the markets wildly fluctuate. Investors frowned on the report, sending the bank’s shares down more than 3 percent to roughly $25.60.

“The economic recovery has been more sluggish and uneven than anyone anticipated,” the bank’s chairman and chief executive, John Stumpf, said in a statement. “We can’t change the economic environment, yet we have worked hard to control the variables we can – making our products and services more relevant to individuals and businesses, focusing on the customer, making as many loans as possible and growing new relationships – as well as fostering longtime ones.”

The strong profit numbers at Wells Fargo bucked the generally grim outlook facing the industry, as big banks struggle to shed the legacy of the mortgage crisis and cope with poor investment banking figures. JPMorgan Chase last week kicked off bank earnings season by reporting a 4 percent drop in profits. Bank of America, which will announce its earnings on Tuesday, has racked up billions of dollars in losses over the last few quarters. And some analysts expect Goldman Sachs, once appearing immune from the industry’s woes, to report a quarterly loss, only the second since the company went public 12 years ago.

While competitors have struggled, Wells Fargo has remained relatively healthy. Profits have grown quarter after quarter. Following the takeover of the Wachovia Corporation at the height of the financial crisis, it established a network of retail branches along both coasts.

Still, Wells is not immune from the industry’s turmoil. The bank reported disappointing revenue numbers across its operation. The massive community banking division, which includes Wells Fargo’s branches and mortgage business, saw revenue drop 7 percent, while revenue declined slightly in the bank’s retail brokerage unit.

While it is no secret the banking industry is struggling, investment banking results have been especially hard hit. Trading revenue, in particular, is hurting from the unnerving volatility in the markets.

Wells does not break out its investment banking results, but the wholesale banking unit, which includes the sales and trading business along with the corporate lending division, had a 4 percent decline in revenue. The bank attributed the drop to weak fixed income sales and trading.

But it could have been worse. Wells Fargo features a far smaller investment bank than most of its big rivals, so it is less exposed to the difficult market conditions that, for instance, caused JPMorgan’s third quarter investment banking profit to tumble 20 percent.

“Investment banking is a boom and bust business, and right now it’s bust,” said Brian Foran, a senior analyst at Nomura Securities International. He noted that it “helps” banks like Wells that are not deeply entrenched in the business.

Wells Fargo’s biggest unit by far is its community-banking arm, which reported a 7 percent drop in revenue, as mortgage banking income slowed and the bank battled the choppy markets.

But the unit saw earnings leap 20 percent compared to the third quarter of 2010. Unlike competitors that had a heavy hand in the mortgage business during the toxic suprime boom, Wells enforced tougher standards for borrowers and only revved up its lending following the 2008 takeover of Wachovia. Wells has since quietly emerged from the mortgage mess as one of the nation’s largest and strongest lenders.

On Monday, the bank reported that its overall loan portfolio jumped to $760 billion, up $8.2 billion from the prior quarter. The bank’s deposits soared, too, up 8 percent from a year ago to nearly $837 billion. The bank also saw an improvement in credit quality, as nonperforming assets declined $7.6 billion from the prior year and net loan charge-offs dropped $1.5 billion. It also recorded the $800 million release in reserves, a nod to the improving loan portfolio.

“There are winners and losers in the mortgage market right now,” said Mr. Foran. “Wells has won this equation.”

Article source: http://feeds.nytimes.com/click.phdo?i=e21ee7c33bd12ad511f2f20c6a59889f

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