Wells Fargo's Profit Rises on Loan Growth -- 2nd Update

By Saabira Chaudhuri 

Wells Fargo & Co. posted a 1.8% rise in fourth-quarter net income as the bank saw stronger loan growth, overshadowing an increase in expenses.

Although per-share earnings met analyst estimates, shares fell 1.5% in premarket trading as a key measure of lending profitability continued to tick down.

Wells Fargo reported net income of $5.71 billion, compared with year-earlier income of $5.61 billion. Per-share earnings, reflecting the payment of preferred dividends, were $1.02 versus $1 a year earlier.

Revenue increased 3.8% to $21.44 billion. Analysts polled by Thomson Reuters expected per-share earnings of $1.02 on revenue of $21.23 billion.

Wells Fargo, run by Chairman and Chief Executive John Stumpf, has been a stock-market favorite among big banks in recent years. The most valuable U.S. bank by market value, Wells Fargo has ridden the recovery in the U.S. economy to 18 straight quarters of year-over-year profit growth through 2014, according to FactSet.

Lending remained a bright spot for Wells Fargo. Total loans grew 4.9% from a year ago to $862.55 billion. Auto loans, an increasingly important business for Wells Fargo in recent years, jumped 9.7% from a year earlier to $55.74 billion.

Chief Financial Officer John Shrewsberry on Wednesday pointed to the bank's strong net interest income, helped by loan growth, while adding that fee income remained solid. Net interest income rose 3.5% to $11.18 billion, and fee income climbed 4.1% to $10.26 billion driven by a jump in card fees.

Wells Fargo's mortgage banking results are closely watched, since as the largest U.S. mortgage lender, the bank is viewed as a bellwether for the U.S. housing market. A slump in refinancing in recent quarters has outweighed any gains in new purchases, although analysts at Jefferies have noted that refinancing activity has spiked, while so-called gain-on-sale margins--or the revenue a bank books divided by the value of mortgages originated--have climbed.

On Wednesday, Wells Fargo reported its home lending originations amounted to $44 billion, compared with $50 billion a year earlier and $48 billion in the prior quarter. Mortgage banking revenue totaled $1.52 billion, down 3.5% from a year earlier.

The San Francisco bank's net interest margin--a key profitability figure that measures the difference between what a bank makes on lending and what it pays depositors--narrowed to 3.04%, compared with 3.27% a year earlier and 3.06% in the prior quarter. Wells Fargo has seen the margin squeezed for several quarters, as deposit growth outstrips its loan growth.

The fourth biggest U.S. bank by assets, Wells Fargo is viewed by many analysts as a conservative institution that didn't get swept up with as many excesses of the previous bubble era and the regulatory scrutiny that has plagued banks with significant investment banking and trading businesses, although it's still on the hook for mortgage litigation.

During the quarter, Wells Fargo saw expenses move higher. Noninterest expense rose 4.7% from a year earlier to $12.65 billion.

Wells Fargo lost much of the tailwind it had previously seen from improving credit quality on its loan books. Reserve releases fell to $250 million from $600 million a year earlier and $300 million in the prior quarter. Banks generally release reserves as credit conditions improve and they perceive less need to hold reserves against potential loan losses.

Wells Fargo's credit-loss provisions ticked up to $485 million, compared with $363 million a year earlier and $368 million in the prior quarter.

Write to Saabira Chaudhuri at [e-mail]

Access Investor Kit for Wells Fargo & Co.

Visit http://www.companyspotlight.com/partner?cp_code=P479&isin=US9497461015

Subscribe to WSJ: http://online.wsj.com?mod=djnwires