May 19, 2024

DealBook: Wells Fargo Profit Jumps 48%

Noah Berger/Bloomberg News

Wells Fargo, the nation’s biggest retail bank, posted record first-quarter profit on Wednesday of $3.8 billion, a 48 percent increase from the period a year earlier, even as it contended with industrywide problems including a slowdown in mortgage lending and the costs of cleaning up the foreclosure mess.

The bank beat analysts’ estimates by a penny, reporting earnings of 67 cents a share in the quarter. That compared with profit of $2.6 billion, or 45 cents a share, in the period a year earlier.

Wells Fargo reduced the amount set aside to cover future loan losses by $3 billion at the same time as its pile of bad loans decreased. The move helped offset a drop in revenue, which fell 5.2 percent, to $20.3 billion, as a mortgage refinancing boom tapered off amid rising rates. Home mortgage originations fell to $84 billion from $128 billion in the final quarter of 2010.

Although losses are easing and corporate lending has picked up, Wells Fargo’s earnings were tempered by the same forces that weighed on the results of Citigroup, Bank of America and JPMorgan Chase. Sluggish consumer lending, the rising cost of servicing troubled mortgages and new financial regulations, like limits on credit card penalties and overdraft fees, have cut into earnings.

Competitors had big Wall Street businesses to make up for some of the missing income from traditional banking activities during the first quarter. But Wells Fargo, which is more heavily oriented to retail banking, could not rely on investment banking and trading profit to bolster the bottom line.

Nevertheless, Wells Fargo’s chairman and chief executive, John Stumpf, said he was pleased with the bank’s performance despite the “uneven recovery.”

“Our strong first-quarter results reflected positive trends in our business fundamentals as credit quality improved, capital ratios increased and cross-selling reached new highs,” he said in a statement.

Wells Fargo quietly emerged from the financial crisis as one of the nation’s strongest banks. After its takeover of the Wachovia Corporation in the fall of 2008, it has also become one of its largest consumer banks, with a large network of retail branches along both coasts. This spring, Wells Fargo converted computer systems and put up new signs on its branches in the New York metropolitan area.

Still, many analysts remain cautious. At a time when its rivals are betting on faster-growing overseas markets, some worry that Wells Fargo is too dependent on the United States recovery. In his statement, Mr. Stumpf acknowledged that while corporate lending activity was up, consumers remained hesitant to borrow.

Along with the slowdown in mortgage lending, Wells Fargo faces rising operating costs — especially in its loan servicing business after it reached a deal with federal regulators to increase staff levels and tighten oversight. Wells Fargo said its operating losses had increased $272 million, almost all related to additional money set aside for higher foreclosure-related matters and compensation.

Citigroup said it expected operating costs for its smaller servicing business to rise about $25 million to $30 million each quarter, and also planned to book as much as $50 million in additional charges related to the foreclosures. Bank of America said its expenses would increase, too. JPMorgan Chase said it took a one-time $1.1 billion charge related to the rising cost of foreclosures.

Like the other big banks, Wells Fargo may be required to buy back bad loans it sold to Fannie Mae, Freddie Mac and other private investors. In the first quarter, the bank set aside $249 million to cover future repurchases, after setting aside $464 million in the fourth quarter.

Still, the spill of red ink has slowed. Athough the housing market and broader economy remain fragile, Wells Fargo said it had released $1 billion from its loan loss reserves in the first three months of the year and expected to continue drawing down its reserves in the coming quarters.

Wells Fargo already had one of the biggest real estate portfolios of any bank. But with the Wachovia deal it absorbed more than $219 billion worth of commercial real estate and corporate loans — and a big book of at-risk mortgages.

“We continue to be optimistic about the improvements in credit quality and remain focused on managing through this cycle,” said Michael J. Loughlin, Wells Fargo’s chief risk officer.

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