April 17, 2024

DealBook: Wells Fargo Profit Jumps, but Revenue Falls Slightly

Noah Berger/Bloomberg News

8:20 p.m. | Updated

Wells Fargo Company posted a 48 percent increase in first-quarter profit on Wednesday, but investors were not impressed by the results, given fears that sluggish mortgage loan growth would erode the bank’s earnings power.

Shares of the bank, which is based in San Francisco, fell 4.1 percent as traders looked past bottom-line earnings of $3.8 billion and focused on slow top-line growth.

Revenue fell 5.2 percent to $20.3 billion as rising interest rates caused the mortgage refinancing boom to slow down.

The bank, which is the nation’s biggest mortgage underwriter, said that home loan origination volume fell by more than 34 percent from the fourth quarter.

Nonetheless, Wells Fargo beat analysts’ estimates by a penny and recorded a record profit with the help of some sophisticated financial management.

The bank reduced the amount it set aside to cover future loan losses by about $3 billion from a year ago even as its pile of bad loans decreased.

The reserve reduction strategy has been a favorite of the major banks this quarter, as they have all taken advantage of the improved economy to lower loan-loss provisions. That leaves more money to be counted as profit, although it can camouflage underlying weakness.

Other giant banks with big Wall Street businesses were able to make up for some of the missing income with stronger results from investment banking and trading. But Wells Fargo, which is more oriented to retail banking, could not.

However, Timothy J. Sloan, Wells Fargo’s newly installed chief financial officer, brushed aside concerns that Wells Fargo would be severely hurt by a fall-off in its mortgage business.

“If rates go up, it is probably because the economy is going to grow,” he said in an interview. “And if the economy is growing, it’s more likely the rest of our businesses will grow.” With an improved economy, he said, he foresees a pickup in its wealth management and small business lending operations, as well as finding new profits by deploying more than $100 billion of cash it has on hand.

Investors were not convinced. Wells Fargo’s stock fell $1.24, to $28.83 a share, while shares of its rivals, Bank of America, Citigroup, and JPMorgan Chase, were flat.

Along with the slowdown in mortgage lending, Wells Fargo faces rising operating costs for servicing loans that are headed into foreclosure, especially after reaching a deal with federal regulators this month to increase staff levels and improve oversight.

Wells Fargo said it took a quarterly charge of about $214 million on its mortgage servicing business after factoring in the higher operating expenses.

The bank has strengthened internal processes and hired 1,000 staff members after adding several thousand last year.

Wells also said it was setting aside an additional $472 million to cover other foreclosure expenses, like fines and litigation costs. That is up from about $193 million in the fourth quarter.

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. Although 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.

“We wanted to see more sustained performance in the improvement of the portfolio,” Mr. Sloan said. “We have seen that trend continue.”

Article source: http://feeds.nytimes.com/click.phdo?i=55a81aaab66c4659ac6965e5eb79b4e2

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