Wells Fargo’s profit rises 25% in 4th quarter as loans grow

Saying housing markets are much improved, Wells Fargo & Co. reported solid increases in overall lending and 25% higher profit for the fourth quarter, although some investors worried as the nation’s largest home lender wrote fewer mortgages than in the previous quarter.

The San Francisco bank said Friday that revenue grew more than 6% during 2012, with improvements in segments including commercial loans, credit cards and wealth management.


But mortgage originations declined 10% compared with the third quarter, raising concerns that a refinance boom that has fattened banks’ results may be waning. What’s more, record low interest rates continued to squeeze profits on lending — news that investors and regulators regard as negative for the entire banking industry.

The results, the first from any major bank this earnings season, were being monitored as an early reading on the industry’s health. Wells Fargo, among the healthiest banks in America, is the fourth largest as measured by assets and the largest as measured by stock market value.

The stock fell 30 cents Friday, just under 1%, to $35.10, with an index of large bank shares also down by less than 1%. The declines follow much larger recent gains for both Wells Fargo and the index.

Wells Fargo Chief Executive John G. Stumpf told analysts that the bank “has never been better positioned” to benefit from an improving economy, having earned a record $18.9 billion for all of 2012, up 19%, and rewarding investors with a 19% increase in per-share earnings as well.

“As we start the new year, we believe we will benefit from some signs of growth that we are seeing in the economy. Jobs are being created, and home prices are increasing. However, there is still a lot of work that needs to be done,” Stumpf said.

Bank executives welcomed the $8.5-billion settlement that Wells Fargo and nine other banks reached this week with regulators to end an expensive case-by-case review of foreclosures for improper procedures, filings and fees.

Wells’ portion of the settlement is $766 million in cash, mostly provided for in the fourth quarter, and an additional $1.2 billion in foreclosure prevention actions, such as loan modifications.

The reviews found few serious abuses, Wells Chief Financial Officer Timothy J. Sloan said in an interview. He said calling off the reviews, which the regulators had first proposed, would save the bank $500 million a year in consulting fees.

Wells Fargo also gave a tentative thumbs-up to mortgage rules issued this week by the Consumer Financial Protection Bureau, with the bank saying it did not believe the rules would hamper home lending. The rules shield lenders from claims that they overburdened borrowers with debt if the banks comply with certain provisions, including making sure that total debt payments total no more than 43% of income for borrowers provided prime loans.

“We are still reviewing the details,” Stumpf said during the conference call. “But so far, it looks like the CFPB issued a rule that should benefit consumers across America by providing strong protection while also ensuring that credit is available.”

“By putting these issues behind us,” he said, “we can focus more of our resources on serving our customers and creating long-term franchise value.”

After paying dividends on preferred stock, Wells Fargo earned $4.9 billion in the fourth quarter, up from $3.9 billion a year earlier. Per-share earnings were 91 cents, up from 73 cents last year and beating analysts’ expectations of 87 cents. Revenue totaled $21.9 billion, up from $20.6 billion a year earlier.

Total loans on Wells Fargo’s books rose $30 billion, up 4%, even as the bank reduced its portfolio of dicey loans marked for liquidation by $18 billion over the year. Sloan said the bank, while still having more deposits than it can put to use in the slow-growing economy, has nevertheless bucked an industry trend of slow loan growth that has been criticized by Federal Reserve Chairman Ben S. Bernanke.

The higher earnings came despite the record low interest rates engineered by the Fed — a boon to borrowers that is becoming a bane to many banks. As older loans and securities holdings mature, banks are replacing them with assets paying lower interest, pinching profit margins.

Rates that banks are paying for deposits have little room to fall, as savers earning 1% or less on their certificates of deposit can attest. When rates begin to rise, the banks could be pinched even further, Thomas J. Curry, the Treasury Department’s top bank regulator, told a California banking conference Friday.

“Funding costs could ramp up faster than in the past, eating into any revenue gains from rising asset yields,” Curry said in remarks prepared for a speech to a convention of bankers in Santa Barbara.

He described the issue as one of the three biggest risks that are worrying regulators, along with banks loosening standards too much for commercial and industrial loans and the lingering effects of the housing bust.

Wells Fargo’s lending margin — the difference between its payments on deposits and earnings on loans — fell to 3.55 percentage points in the fourth quarter from 3.66 in the third and 3.89 percentage points a year earlier.

The bank’s overall mortgage results rose, thanks to higher profits on its customer-service operations and sale of loans. However, the number of mortgages in Wells’ pipelines fell, and new mortgage originations declined from $139 billion in the third quarter to $125 billion in the fourth.

Sloan said much of the decline reflected Wells Fargo’s exit from the so-called wholesale channel, which makes loans through independent mortgage brokers.

Analyst Frederick Cannon at Keefe, Bruyette & Woods said he had expected some decline and that Wells Fargo’s mortgage business was still strong. But the drop was larger than anticipated, Cannon said, and he cut his per-share forecast for Wells earnings in 2013 and 2014 by a nickel each year to $3.50 and $3.60.

A note to clients from Stifel Nicolaus analyst Christopher Mutascio said Wells Fargo’s mortgage numbers looked “relatively healthy” but may indicate “that the refinance boom is losing steam.”