In this Monday, July 13, 2015 photo, people walk past a Wells Fargo ATM in New York.Mark Lennihan/The Associated Press
Wells Fargo & Co., the biggest U.S. home lender, posted profit that matched analysts' estimates as higher interest rates crimped revenue from mortgage banking.
Second-quarter net income was little changed at $5.72-billion (U.S.), or $1.03 a share, from $5.73-billion, or $1.01, a year earlier, the San Francisco-based bank said Tuesday in a statement. Net interest margin, a profitability measure for lending, climbed to 2.97 per cent from 2.95 per cent at the end of March.
Rising rates have eroded Wells Fargo's dominance in the mortgage market and curtailed refinancings, traditionally an area of strength because of the bank's industry-leading servicing portfolio. The company, led by Chief Executive Officer John Stumpf, made about 13 per cent of U.S. home loans in the first quarter, down from 28 per cent three years ago.
Revenue from mortgage banking fell 1 per cent to $1.71-billion in the second quarter from a year earlier, while originations rose to $62-billion from $47-billion, the bank said. The pipeline of pending loan applications fell to $38-billion at the end of June from $44-billion in March.
The average rate on a 30-year fixed-rate mortgage jumped to 4.27 per cent during the week ended June 26 from 3.74 per cent at the beginning of April, according to bankrate.com.
'More Optimistic'
Home lenders originated $378-billion of mortgages in the second quarter, a 21 per cent increase over the preceding period and a 27 per cent gain from a year earlier, according to a June 18 forecast from the Mortgage Bankers Association, a Washington– based trade group.
Expectations for a healthy mortgage business had prompted analysts to increase their profit estimates. Paul Miller at FBR Capital Markets raised his by 2 cents to $1.01 on July 10, based on a "more optimistic" outlook for originations. Kevin Barker at Compass Point Research & Trading LLC boosted his estimate by 3 cents to $1.03 on June 25 in anticipation of more income servicing home loans.
Net interest income increased 4 per cent from a year earlier to $11.3-billion. The company released $350-million of loan-loss reserves, more than the $100-million estimate of Deutsche Bank AG analysts.
Wholesale Banking
Wells Fargo slipped 1.3 per cent to $56 at 9:08 a.m. in New York. The shares gained 3.5 per cent this year through Monday, trailing the 4.6 per cent advance of the 24-company KBW Bank Index.
Community banking, made up of businesses led by Carrie Tolstedt and Avid Modjtabai, fell 2.2 per cent to $3.36-billion from a year earlier, according to the statement. Revenue for the unit rose less than 1 per cent to $12.7-billion.
Earnings from wholesale banking, run by Tim Sloan, advanced 3 per cent to $2.01-billion, as revenue increased 2 per cent to $6.08-billion. Profit from wealth management, led by David Carroll, climbed 11 per cent to $602-million on a 5.3 per cent gain in revenue to $3.74-billion.
In April, Wells Fargo agreed to purchase $9-billion of loans from General Electric Co., and finance other assets purchased by Blackstone Group LP or entities that it controls.
Wells Fargo may purchase more from GE as the Fairfield, Connecticut-based firm winds down its finance arm, including a collection of businesses that together have about $40-billion in loans, people familiar with the process said last month.
Such purchases should help cushion the margin, which fell below 3 per cent in the first quarter for the first time since the 1990s as the bank plowed billions of dollars in deposits into lower-yielding assets.