Wells earns $4.9 billion for shareholders

Thinner interest margin may squeeze earnings

adunn@charlotteobserver.comJanuary 12, 2013 

Again, Wells Fargo reported record-setting profits, and again, its share price fell on earnings day.

While the bank’s mortgage business is booming, investors seem to worry it could soon falter – and low interest rates are making it harder for Wells to make money in the meantime.

The San Francisco bank beat expectations Friday by posting net income of $4.9 billion for shareholders in the fourth quarter, up 25 percent from the same time last year.

The 91 cents per share marked another record. Mortgage banking again was a primary earnings driver for the nation’s top home lender, making up more than $3 billion of its fourth-quarter income.

The bank earned $18 billion for shareholders for the full year 2012, up 20 percent from the year before.

“These strong quarterly results are just part of an outstanding year of achievement for Wells Fargo,” CEO John Stumpf said in a conference call with analysts Friday. “With all that we accomplished last year, I believe Wells Fargo has never been better-positioned, and I am very optimistic about the year ahead.”

But shares closed down just under 1 percent, at $35.10. The same thing happened in October after the bank’s third-quarter earnings.

A primary reason each time: The bank’s net interest margin fell.

The figure is a key measure of a bank’s performance and reflects the difference between what it pays depositors and what it earns on its investments and loans. Low interest rates have put pressure on these margins across the industry.

At Wells, the metric fell to 3.56 percent from 3.66 percent in the previous quarter.

Stumpf and Chief Financial Officer Tim Sloan attributed the decline to an influx in deposits, which they said the bank welcomed as a way to build relationships. They defended the performance during multiple questions from analysts.

“Why would we turn away deposits from our customers?” Stumpf asked at one point. “Surely we look at the margin, surely we think about that. But we don’t run our business according to it.”

The other factor is the bank’s mortgage banking business, which has buoyed the bank as homeowners around the country have refinanced their loans.

The unit contributed $3.1 billion in income, up 9 percent from the quarter before.

But loan application and origination volumes fell, and the pipeline heading into the first quarter of 2013 was smaller than what the bank brought into the fourth quarter. Analysts with Fitch Ratings wrote Friday that while activity was strong, they expect it to slow.

Sloan said he doesn’t feel the bank has seen the end of strong mortgage performance, but did not give an estimate of how long it would last. He said that judging by the mortgages the bank services, plenty more refinancing is possible.

“Could it last a couple more quarters? Sure it could,” Sloan said. “Could it last through the end of the year? Your guess is as good as mine, but there’s a lot of opportunity out there.”

Wells was the first of the country’s large banks to report fourth-quarter earnings. Bank of America reports its results Thursday.

Dunn: 704-358-5235 Twitter: @andrew_dunn

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