Wells Fargo earns record $4.7 billion

Strong 3Q performance tied to homeowners refinancing mortgages

Posted: Friday, Oct. 12, 2012

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Stock quote: Wells Fargo
JPMorgan also reports record profits tied to refinancing

JPMorgan Chase, the country’s biggest bank, reported a record quarterly profit Friday, helped by a surge in mortgage refinancing. CEO Jamie Dimon said he believed the housing market “has turned a corner.”

The bank made $5.3 billion from July through September, up 36 percent from the same period a year ago. It worked out to $1.40 per share, blowing away the $1.21 predicted by analysts polled by FactSet, a provider of financial data.

Revenue rose 6 percent to $25.9 billion, beating expectations of $24.4 billion. Earnings were also helped because the bank set aside less money for bad loans – $1.8 billion, down 26 percent from a year ago.

Revenue from mortgage loans shot up 29 percent. About three-quarters of that was from people refinancing, rather than buying new homes. Low interest rates and government help encouraged homeowners to refinance.

A Federal Reserve survey earlier this week found that a stronger housing market helped economic growth in almost every part of the country. Home sales are up, prices are rising more consistently in most places, and builders are more confident.

Dimon noted that the bank was still seeing a high level of souring mortgage loans, and said he expects high default-related expenses “for a while longer.” And he noted homeowners are still struggling under mortgages they can’t afford, saying the bank was working to modify those loans. Associated Press

Low interest rates are still spurring homeowners to refinance their mortgages in droves. And Wells Fargo & Co. is still making billions from it.

The country’s largest mortgage servicer reported Friday earning $4.7 billion for shareholders in the third quarter, another record for the San Francisco bank.

The 88 cents per share beat out analysts’ estimates by a cent, and was 22 percent higher than the same period a year ago.

“We had a very strong quarter,” Chief Financial Officer Tim Sloan said on a conference call with analysts, noting that it marked the 11th straight quarter of earnings per share growth.

But those low interest rates also held up the bank’s performance elsewhere. Revenue was down slightly from the previous quarter, to $21.2 billion, mostly because of the shrinking gap between what the bank makes on its loans and investments and what it pays depositors and lenders.

That key metric, the net interest margin, fell significantly more than the bank had forecast. Marty Mosby, an analyst with Guggenheim Securities, wrote that the net interest margin “overshadowed” the bank’s positive news.

Wells Fargo shares fell more than 2.5 percent, closing at $34.25.

Wells’ mortgage banking income, which has driven the bank’s earnings growth over the last few quarters, faltered a bit as well. It fell to $2.8 billion from $2.9 billion the quarter before. Mortgage revenue was still up 53 percent over last year.

“We believe investors were looking for a much stronger mortgage banking fee income result,” analysts with investment firm Stifel Nicolaus wrote in a research note parsing the results.

Mortgages cost more to service, Wells said, because of new regulations brought about by legal settlements, cutting into its income. The bank also decided to hold nearly $10 billion worth of mortgages on its balance sheet instead of selling them to investors.

Instead of booking profits up front, the bank hopes to make more money over the life of the mortgages at a time when low-risk investments with a high yield are hard to find.

“That’s how we think about managing the company for the long term,” Sloan told analysts.

Bank of America Corp. reports its third-quarter earnings Wednesday.