BLOOMBERG: Wells Fargo Posts Record Profit, Citing Mortgage Lending

 January 17, 2012 9:18 PM

Jan. 17 (Bloomberg) -- Wells Fargo & Co., the largest U.S. bank by market value, posted record profit for the fourth quarter and full year that beat analysts' estimates as mortgage financing improved.

Net income rose 20 percent in the quarter to $4.11 billion, or 73 cents a share, from $3.41 billion, or 61 cents, a year earlier, the San Francisco-based company said in a statement today. That exceeded the 72-cent estimate of 31 analysts surveyed by Bloomberg. Revenue declined 4 percent to $20.6 billion, better than the $20 billion forecast by analysts. For the year, net income climbed 28 percent to $15.9 billion.

“I'm extremely pleased with Wells Fargo's performance in 2011,” Chief Executive Officer John Stumpf said in the statement, citing growth in deposits and loans. The bank plans on “returning even more capital to our shareholders.”

Slowing economic growth, low interest rates and volatile capital markets have sapped revenue at the largest U.S. banks, leading them to seek other sources and cut expenses. Stumpf, 58, reduced his staff by 3 percent to 264,200 and reaffirmed plans to trim $1.5 billion in quarterly costs by the end of this year.

New Mortgages

New mortgages rose 35 percent to $120 billion from the three months ended September at Wells Fargo, the biggest U.S. home lender. Net interest margin, the difference between what the bank pays for funds and what it earns on loans and securities, climbed to 3.89 percent from 3.84 percent in the third quarter.

Compared with the third quarter, “the net interest margin went up, revenues were up,” Paul Miller, an analyst at FBR Capital Markets in Arlington, Virginia, told Betty Liu on Bloomberg Television's “In the Loop” today. “These were two things that people really look at out there, and they showed really good numbers.”

Some year-over-year comparisons weren't as favorable, with the net interest margin narrowing from 4.16 in 2010's fourth quarter and pretax, pre-provision profit dropping 1 percent. Management calls the latter figure a useful gauge of the company's ability to generate capital to cover losses through a credit cycle. Income was boosted by a release of $600 million from reserves, with the bank predicting more of the same during 2012. Noninterest income from mortgage banking dropped 14 percent from a year earlier as originations slipped 6 percent.

Shares Gain

Wells Fargo shares advanced 0.7 percent to $29.83 in New York. The company became the most valuable U.S. bank even after last year's 11 percent stock decline, because most rivals fell further. The lender's market value of $156.1 billion as of last week compares with $136.5 billion at JPMorgan Chase & Co. and was more than the value of Goldman Sachs Group Inc., Morgan Stanley and Bank of America Corp. combined.

Berkshire Hathaway Inc., the investment and holding company run by Chairman and CEO Warren Buffett, is the biggest Wells Fargo shareholder, with a stake of about 6.9 percent.

The bank finished absorbing Wachovia Corp., the lender saved from collapse in 2008 when Wells Fargo beat Citigroup Inc. in a bidding contest. Stumpf said future deals are likely to be domestic, “bolt-on acquisitions,” using a term for takeovers that fit with a company's existing operations or expand in nearby regions, rather than venturing into a new field.

Tire-Kicking

“We are kicking lots of tires and we are in a unique position in that we are not capital constrained and can do some things that make good sense for us economically,” Stumpf said during a conference call with analysts. “It'll have to make a lot of sense for us, and if all we get out of this is sore toes, that's fine.”

Banks including Wells Fargo have fallen short in efforts to replace revenue lost to new financial rules such as those capping debit-card interchange fees. Wells Fargo reported a $365 million decline in debit-card interchange fees, partially offset by more fee income from credit cards.

The bank canceled plans last year to charge $3 monthly for using its debit cards after customers in a five-state pilot program protested, and Bank of America abandoned a proposed $5 fee.

Wells Fargo is facing claims from mortgage-bond investors. A bondholder group that won an $8.5 billion settlement from Bank of America said this month it may also seek payments from Wells Fargo on more than $19 billion of residential mortgage-backed securities issued by affiliates of the bank.

Building Share

Wells Fargo has pursued more home lending even as rivals shy from the business, according to Stumpf. “We like the mortgage business,” he said on the conference call.

A retreat “makes absolutely no sense to us,” said Chief Financial Officer Tim Sloan in an interview. “There are lots of reasons to look at a business and get upset about it,” Sloan said. “This is a great opportunity for us and we have been building share throughout this entire time.”

Non-interest expenses rose to $12.5 billion in the fourth quarter from $11.7 billion in the three months ended September on higher compensation and foreclosure costs, according to the statement.

Wells Fargo may seek to return more capital to shareholders this year. The bank may boost its quarterly dividend from 12 cents to 20 cents this year, according to Edward Najarian, an analyst at International Strategy & Investment Group Inc. He has a “buy” rating on Wells Fargo.

JPMorgan, the largest bank by assets, said last week that fourth-quarter net income slid 23 percent to $3.73 billion. Bank of America, based in Charlotte, North Carolina, will probably post $1.63 billion in profit on Jan. 19, according to 13 analysts surveyed by Bloomberg. New York-based Citigroup said today fourth-quarter income dropped 11 percent.

--Editors: Rick Green, Dan Kraut

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