Wells Fargo & Co., the largest U.S. home lender, posted record fourth-quarter and fullyear profit that was bolstered by expense cuts and one-time gains, raising concern among some analysts about the quality of the earnings.
Net income advanced about 10 percent for the quarter to $5.61 billion, or $1 a share, from $5.09 billion, or 91 cents, a year earlier, the San Francisco-based company said Tuesday in a statement. The average estimate of 33analysts surveyed by Bloomberg, excluding some items, was 98 cents a share. For the full year, profit rose 16 percent to $21.9 billion.
Chief Executive Officer John Stumpf, 60, is trimming staff and expenses as rising interest rates curtail demand for home refinancings. While Wells Fargo’s profit was enough to beat the consensus of Wall Street analysts, mortgage applications plunged, and Oppenheimer & Co.’s Chris Kotowski told clients that results were helped by more than $1.2 billion from reserve releases and equity investment gains.
“Wells is straining to make this,” Kotowski wrote in a note to clients. “Most of the line items were very close to expectations, though all modestly on the adverse side of expectations.”
Shares of Wells Fargo, ranked fourth by assets among U.S. lenders, rose 3 cents Tuesday to close at $45.59. The stock gained 33 percent last year, trailing the 35 percent rally for the 24-company KBW benchmark.
Revenue slid 6 percent in the quarter from a year earlier to $20.7 billion and 3 percent for the full year to $83.8 billion. Profit before taxes and provisions fell 5 percent.
Net interest margin, the difference between what the bank makes on lending and pays for funds, fell to 3.26 percent from 3.38 percent in the third quarter. Deposits and loans both increased.
Noninterest expense dropped 6 percent and the efficiency ratio, which measures costs as a percentage of revenue, improved to 58.5 percent from 59.1 percent in the third quarter and 58.8 percent a year earlier.
Profit rose in all three operating segments, with the greatest percentage gains coming in wealth, brokerage and retirement, the unit run by David Carroll.
At the consumer bank, mortgage originations fell to $50 billion, a 37.5 percent decline from the third quarter, and mortgage-banking income fell by almost half from year-earlier levels to $1.57billion. Applications were down to $65 billion from $87 billion the previous quarter as demand for refinancings slumped, and the pipeline of pending applications dropped to $25 billion at the quarter’s end from $35 billion as of Sept. 30.
“Our market share over the last couple of years was disproportionately high primarily because the biggest driver for origination volume until the last couple quarters was refinances,” Chief Financial Officer Timothy J. Sloan said on the earnings call.
Responding to analysts’ concerns about the quality of the bank’s earnings, Sloan said that equity gains were less than the previous year’s fourth quarter, while annual figures were in line with the previous year. Earnings improved over the third quarter even as the bank had a smaller reserve release, which shows the strength of other units, he said.
Business, Pages 25 on 01/15/2014