Wells Fargo on Friday reported record second-quarter profit of $5.3 billion, an increase of 20 percent from the same period last year, as the company set aside less money for bad loans.
Revenue inched up by about $90 million, to $21.4 billion, from a year ago. Earnings per share reached 98 cents, higher than analysts’ expectations of 93 cents.
Wells decreased its pool to cover bad loans by 64 percent, to $652 million, compared with the same quarter last year – a sign that borrowers are doing better at repaying loans. That move comes as other banks are also setting aside less to write off loan losses. JPMorgan Chase, for example, in announcing second-quarter results Friday, said it reduced its provisions for loan losses in consumer and community banking by $1.5 billion.
Wells Fargo, the largest private mortgage lender in the U.S., is feeling the effects of rising mortgage rates, which are coinciding with a strengthening U.S. housing market. As more people buy homes, it bodes well for the company’s mortgage origination business. But as interest rates rise, borrowers are less likely to refinance, cutting into that part of Wells Fargo’s business.
In a call with investors Friday, chief executive John Stumpf played down the impact of rising interest rates. He said Wells Fargo has a “diversified business model,” pointing to more than 90 businesses within the company.
“We are not dependent on any one business to generate growth,” he said.
Wells Fargo, which originates roughly one out of every three mortgages in the U.S., said mortgage applications fell to $146 billion in the second quarter, down from $208 billion last year but up from $140 billion in the first quarter.
The company also reported a second-quarter decline in home mortgage originations, down to $112 billion from $131 billion a year ago. That decline has come as the percentage of mortgage applications stemming from refinances has been falling for Wells since the fourth quarter.
Refinances totaled 54 percent of applications in the second quarter, down from 69 percent a year ago. Although mortgage applications and originations have been rising this year, Wells is expecting rising interest rates to continue to weigh on its mortgage business.
“That’s going to affect originations for sure,” Tim Sloan, chief financial officer, said. “We think volumes are going to be down.”
Roughly 10 percent of Wells’ revenue stems from its mortgage business, Sloan said.
On Wednesday, the Mortgage Bankers Association said the average interest rate for a 30-year, fixed-rate mortgage rose last week to 4.68 percent, the highest rate since July 2011, from 4.58 percent the previous week. Mortgage applications decreased 4 percent from the week before.
Stumpf said the company’s diversified business model helps it to weather the increase in rates.
“We knew rates would eventually rise,” Stumpf said. “Some of our businesses naturally do better in a lower-rate environment, and others benefit from rising rates. We do not manage Wells Fargo based on a specific rate environment.”
Nancy Bush, a banking analyst with NAB Research, said the mortgage business is shifting. “I don’t think the mortgage business will necessarily be less profitable,” she said. “But it will be less about origination and more about servicing.”
But as interest rates rise, the value of Wells Fargo’s mortgage-servicing portfolio increases, she said, adding that the decline in refinancing activity is “being replaced by purchase business, which means people actually out buying houses.”
Roberts: 704-358-5248 Twitter: @DeonERoberts
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