Wells earns $4.9 billion for shareholders

But shrinking margin suggests booming mortgage business will slow down

Posted: Friday, Jan. 11, 2013

Diedra Laird - dlaird@charlotteobserver.com

Wells CEO John Stumpf speaks to 3,000 employees at the Charlotte Convention Center to celebrate the completion of retail bank conversion. He was here celebrating the multi-year conversion of more than 3,000 Wells retail stores. Diedra Laird - dlaird@charlotteobserver.com

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Highlights from Wells Fargo’s presentation

Wells Fargo executives provided these updates to analysts Friday:

Fiscal cliff helped loan book: All the talk last month was about uncertainty associated with the political showdown over automatic tax increases and spending cuts. But the debate ended up helping boost Wells Fargo’s loan portfolio. “I would say the fiscal cliff was a net positive to loan growth,” Chief Financial Officer Tim Sloan said. He said some of the bank’s corporate clients increased their loans, particularly at the end of December, as the specter of higher taxes loomed. The bank’s core commercial loan portfolio grew 3 percent from the quarter before, to $358 billion.

Real estate footprint shrinking: Wells Fargo shrank its office holdings by 4.5 million square feet in 2012, Sloan said, as the bank continues to try to cut costs. The bank has eliminated 16 million square feet total since 2008.

More capital to shareholders requested: Sloan confirmed that Wells has asked the government for the go-ahead to distribute more capital to shareholders in 2013 than it did in 2012. He didn’t give any indication on what combination of dividend increases or share buy-backs that entailed. Sloan said later on the call that the bank does want to buy back more shares in the coming years. Wells repurchased 120 million shares in 2012 and increased its dividend from 12 cents to 22 cents.

Changes possible at branches: Wells Fargo says it has a branch – or store, as the bank calls it – within two miles of half the American population. But Bank of America and others have been trimming their networks as more activity moves online. Stumpf got a question about what Wells was planning when it comes to branches. After touting the bank’s reach and saying most customers still decide on a bank based on proximity, he hinted that changes could be coming to the size of its branches and its staffing levels. “That needs to evolve and it is evolving.” Andrew Dunn

Again, Wells Fargo reported record-setting profits but, again, its share price fell on earnings day.

While the bank’s mortgage business is booming, investors seem to worry it could soon falter – and low interest rates are making it harder for Wells to make money in the meantime.

The San Francisco bank beat expectations Friday by posting net income of $4.9 billion for shareholders in the fourth quarter, up 25 percent from the same time last year.

The 91 cents per share marked another record. Mortgage banking again was a primary earnings driver for the nation’s top home lender, making up more than $3 billion of its fourth-quarter income.

The bank earned $18 billion for shareholders for the full year 2012, up 20 percent from the year before.

“These strong quarterly results are just part of an outstanding year of achievement for Wells Fargo,” CEO John Stumpf said in a conference call with analysts Friday. “With all that we accomplished last year, I believe Wells Fargo has never been better positioned and I am very optimistic about the year ahead.”

But shares closed down just under 1 percent, at $35.10. The same thing happened in October after the bank’s third-quarter earnings.

A primary reason each time: The bank’s net interest margin fell.

The figure is a key measure of a bank’s performance and reflects the difference between what it pays depositors and what it earns on its investments and loans. Low interest rates have put pressure on these margins across the industry.

At Wells, the metric fell to 3.56 percent from 3.66 percent in the previous quarter.

Stumpf and Chief Financial Officer Tim Sloan attributed the decline to an influx in deposits, which they said the bank welcomed as a way to build relationships. They defended the performance during multiple questions from analysts.

“Why would we turn away deposits from our customers?” Stumpf asked at one point. “Surely we look at the margin, surely we think about that. But we don’t run our business according to it.”

The other factor is the bank’s mortgage banking business, which has buoyed Wells as homeowners around the country have refinanced their loans.

The unit contributed $3.1 billion in income, up 9 percent from the quarter before.

But loan application and origination volumes fell, and the pipeline heading into the first quarter of 2013 was smaller than what the bank brought into the fourth quarter. Analysts with Fitch Ratings wrote Friday that while activity was strong, they expect it to slow and to contribute less to the bank’s earnings.

Sloan said he doesn’t feel the bank has seen the end of strong mortgage performance, but he did not give an estimate of how long it would last. He said that judging by the mortgages the bank services, plenty more refinancing is possible.

“Could it last a couple more quarters? Sure it could,” Sloan said. “Could it last through the end of the year? Your guess is as good as mine, but there’s a lot of opportunity out there.”

Wells was the first of the country’s large banks to report fourth-quarter earnings. Bank of America reports its results Thursday.