The slowing pace of mortgage refinancings put a big dent in Wells Fargo’s profits, but an improving housing market allowed the bank to continue its streak of record earnings, Wells announced Friday.
Wells executives told investors they were optimistic that a rising economy would be more than enough to outweigh the bank’s rapidly diminishing mortgage business.
“While refinance volume is down and it has an impact on us, the improvement in housing is really good for America, good for our customers and ultimately good for our company,” CEO John Stumpf said on a conference call with analysts. “People are feeling better, and we’ll respond.”
The bank reported earning $5.32 billion for shareholders in the third quarter, or 99 cents per share. That narrowly beat Wall Street expectations and was up 1 percent from a profit of $5.27 billion, or 98 cents per share, in the second quarter.
The results marked the 10th straight quarter of record profits at the San Francisco bank. Wells maintains its largest employee base in Charlotte, where it employs about 20,000.
As the largest U.S. mortgage originator, Wells Fargo’s earnings were hurt by the dramatic slowdown in the home loan market. As mortgage rates began to rise, the flood of refinancings that had propelled Wells Fargo’s mortgage business dropped off significantly.
Wells executives had warned for weeks that their mortgage originations could fall to a two-year low. That, in fact, came to pass.
Originations fell nearly 30 percent, and mortgage banking income fell more than 40 percent from the quarter before, to $1.6 billion. Refinancings were cut nearly in half.
“That number struck me as bigger than what I was anticipating,” said Shannon Stemm, a bank analyst for Edward Jones. She said she had thought Wells would be able to counter a decline in refinancings by increasing new home purchase loans, “but you didn’t see a lot of growth there, either.”
But the dynamics in the housing market were also the driving force behind the bank’s profit. Wells was able to increase its earnings primarily by setting aside less money for bad loans and releasing about $900 million it had set aside before.
It’s an accounting gain that typically benefits banks when overall credit conditions improve.
What comes next
As the fourth quarter continues, Wells Fargo executives Friday said they expect the bank’s mortgage business to slow even more.
Analysts peppered Wells executives with questions about whether the bank would be able to cut costs enough to keep pace.
As mortgage rates rose, Wells Fargo announced more than 5,300 layoffs to bring costs down.
Those employees, mostly loan processors, were given 60-day notices, so their salary costs were still in the third quarter results, Chief Financial Officer Tim Sloan said. As they leave, costs will come down, he said.
Analysts also tried to pin down the bank on which parts of its business would drive growth going forward.
“It’s not just one driver that’s going to get us to continue to be able to grow the company,” Sloan said.
One obstacle could be consumers’ continued hesitation to borrow, analysts said.
Daniel Marchon, an analyst with Raymond James & Associates, said consumer loan demand across the banking industry continues to be weak. Consumers have been reluctant to borrow during a slow economic recovery that has seen one negative headline after another, the partial government shutdown being the most recent, he said.
“It really wasn’t a standout quarter on the consumer side, and we’ve kind of come to live with that,” he said.
Wells Fargo shares closed relatively unchanged Friday, at $41.43.
Wells Fargo joined JPMorgan Chase as the first of the big banks to report third-quarter earnings. JPMorgan swung to a loss under the weight of more than $9 billion in legal costs.
Bank of America will report its earnings Wednesday.
Dunn: 704-358-5235; Twitter: @andrew_dunn