Wells Fargo's Profit Climbs -- 2nd Update

By Saabira Chaudhuri 

Wells Fargo & Co. on Friday posted a 14% rise in net income, handily beating analyst estimates, as a continued slowdown in the bank's lucrative mortgage business was offset by better expense controls and stronger credit quality.

Shares rose 1% in recent premarket trading.

Wells reported net income of $5.89 billion, compared with year-earlier income of $5.17 billion. Per-share earnings, reflecting the payment of preferred dividends, were $1.05 versus 92 cents a year earlier. Revenue declined 3% to $20.63 billion.

Analysts polled by Thomson Reuters expected per-share earnings of 97 cents on revenue of $20.6 billion.

The results come after rival J.P. Morgan Chase & Co. earlier Friday reported results that disappointed investors and sent its stock down about 3% in premarket trading.

As the largest U.S. mortgage lender, Wells Fargo is viewed as a bellwether for the U.S. housing market. In the first quarter, Wells Fargo reported its home lending originations amounted to just $36 billion, compared with the $109 billion reported a year earlier and $50 billion in the prior quarter. While Wells Fargo and other large commercial banks have seen mortgage originations squeezed, the bank has a significant share in funding home purchases, an area that held up better than refinancing businesses. Mortgage banking noninterest income totaled $1.51 billion, down 46% from a year earlier.

J.P. Morgan's results showed mortgage loan originations down 68% from the prior year, and mortgage banking profit of$114 million, down by $559 million from the prior year.

Wells Fargo in February said it would lower its minimum credit score for certain mortgages eligible for government backing, a move that analysts expect to see more of as U.S. banks look for new business amid lower refinancing volumes and more stable home prices.

Ahead of Wells Fargo's earnings report, analysts at Alliance Bernstein said they expect the bank benefit from prior mortgage-related head count reductions as lagging severance costs fade. In response to the mortgage slowdown, Wells Fargo has cut roughly 7,000 jobs since July.

For the first quarter, Wells Fargo reported its noninterest expense dropped 3.6% to $11.95 billion from $12.4 billion a year ago. The drop was driven largely by declines in commission and incentive compensation along with employee benefits expense.

Improving credit has bolstered financial results at banks across the industry, although many analysts expect that benefit to slow, a trend shown in rival J.P. Morgan's results earlier Friday.

Still, at Wells Fargo, the first-quarter reserve release rose to $500 million from $200 million a year earlier. Banks generally release reserves as credit conditions improve and they perceive less of a need to hold reserves against potential loan losses.

Meanwhile, Wells Fargo's credit-loss provisions totaled $325 million, compared with $1.22 billion a year earlier.

Results from Wells Fargo--which along with J.P. Morgan--kick off the first-quarter reporting season for large U.S. banks, are closely watched as being indicative of what's to come from rivals. As in recent quarters, banks are expected to be battered by both weak trading revenue and slumping mortgage lending.

Wells Fargo--which recently surpassed J.P. Morgan as the U.S. bank with the highest annual profit--is also the only large U.S. bank for which analysts raised their earnings forecasts for the quarter. Analysts had expected the bank to post a profit greater than the same quarter a year ago, thanks in part to cost cuts and its relatively small trading business.

The quarter's results weren't all sunny however. Loan growth at Wells Fargo--a key revenue driver for any retail bank--showed signs of slowing. Total loans rose by $4.2 billion sequentially to $826.4 billion, compared with sequential growth of $13.5 billion in the fourth quarter.

Meanwhile, Wells Fargo's net interest margin was down at 3.20%, compared with 3.49% a year earlier and 3.27% in the prior quarter. The San Francisco bank has one of the highest net interest margins in the industry, yet it saw that metric, an important measure of lending profitability, slide 0.10 percentage points in 2013.

Christina Rexrode contributed to this article.

Write to Saabira Chaudhuri at [e-mail]

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