Wells Fargo rises on mortgage refinancing

Net income jumps 22 per cent to $4.9bn

Wells Fargo reported yet another increase in quarterly profits after the biggest home loan lender in the US was buoyed by a wave of mortgage refinancings.

Net income jumped 22 per cent in the three months ending September 30 to a record $4.9bn compared with the same period last year. Earnings per share rose from 72 cents in the third quarter of 2011 to 88 cents in the most recent quarter.

“We’ve now achieved six consecutive quarters of record net income and [earnings per share],” John Stumpf, Wells chairman and chief executive, said. “Core loans grew by $11.9bn and we saw continued strength in our mortgage and deposit businesses.”

While a surge in mortgage refinancings, spurred by a government programme and the Federal Reserve’s low interest rates, helped boost revenues in the quarter, Wells is still contending with the downside of lower rates, which eat into its ability to generate profits. The bank’s net income margin – a measure of its ability to make money on loans – fell 18 basis points in the period to 3.66 per cent.

Analysts had expected earnings of 87 cents a share, according to Bloomberg, but Wells shares fell 3 per cent in pre-market trading as investors pondered the results.

To help offset lower margins, Wells has been attempting to trim costs, last year announcing “Project Compass” in an effort to cut $1.5bn from overheads.

Expenses actually rose 8 per cent to in the most recent quarter, as the bank hired more employees to deal with surging mortgage refinancings.

“We expect strong mortgage revenues and improved capital markets revenues to lead to improved revenue growth in the quarter,” Credit Suisse analysts Moshe Orenbuch and Jill Glaser wrote in a note to clients before Friday’s results. “Specifically, we [expect] solid mortgage banking activity reflecting a quarter on quarter increase in origination volumes given low rates and refinance activity.”

While new mortgages are boosting profits at the bank, Wells has yet to untangle itself completely from the lingering effects of the subprime crisis.

Earlier this week Wells was sued for more than $600m by the US Department of Justice for alleged “reckless” lending practices that defrauded a government mortgage insurance programme in the run-up to the housing crash.

Still, the bank has grown its market share since the crisis to become one of the biggest mortgage lenders in the US and the largest by market value. Total revenues grew 8 per cent to $21bn in the third quarter as loans continued to increase.

Wells’ biggest competitor, JPMorgan Chase, also reported results on Friday. The bank posted net income of $5.7bn, up sharply from $4.3bn last year – also augmented by a surge in its mortgage business, as well as improved capital markets.

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