Wells Fargo net income rises in second quarter

Is a Wells Fargo net income rise a reflection of better banking figures? Being the first major bank to post results for the second quarter, America’s third largest bank by assets usually sets the tone for the rest of the industry.

Net income in Q2 2014 rose 4% to $5.7 billion, or $1.01 per diluted common share, compared to Q2 2013’s $5.5 billion. During the first six months of this year, net income was $11.6 billion versus $10.7 billion during the same period last year.

Based on data from FactSet, profits were higher year-over-year for the 16th successive quarter.

Revenue fell by 1% to $21.1 billion, which was slightly better than the $20.8 billion prediction by Wall Street analysts.

Losses on loans declined by 52% in Q2 to $717 million, compared to $1.2 billion a year ago. Wells Fargo wrote that the improved credit quality of its loans together with a healthier housing market allowed it to free up $500 million that had been assigned as a provision for loan losses.

Mortgages sharply down, deposits up

In the second quarter Wells Fargo lent a total of $47 billion in mortgages, a sharp fall from $112 billion in Q2 2013. As the country’s largest mortgage lender, the bank is seen as a bellwether for the housing market, which appears to have cooled off.

Wells Fargo total loans, however, rose by 4% to $829 billion, despite the drop in home loans.

Many of the crippling mortgage losses suffered by scores of large banks during the financial crisis were avoided by Wells Fargo. This does not mean, however, that the bank is not willing to take risks. It has pushed aggressively into areas like auto lending, which rose by 9% to $7.8 billion in Q2 2014 compared to Q2 2013.

Wells Fargo says it is selling part of its student loan business. Chief Financial Officer John Shrewsberry said “We see an opportunity in the market to move those loans off the books, they’re relatively low yielding, not strategic, and we don’t have big relationships with most of those customers.”

Average deposits rose 9% to $1.1 billion in Q2. The higher payouts to depositors versus interest payments collected from borrowers pinched profits. Its net interest margin fell from 3.47% to 3.15%.

The basic business of banking is being severely undermined by current low interest rates, a hurdle all banks are facing.

Diversification improved performance

Wells Fargo net income
Wells Fargo is the largest mortgage lender in the United States.

Chairman and CEO John Stumpf said the strong results seen in Q2 2014 reflect the benefits of the bank’s diversified business model and its long-term focus on meeting the financial needs of its customers.

Mr. Stumpf said:

“By continuing to serve customers we grew loans, increased deposits and deepened our relationships. Our results also reflected strong credit quality driven by an improved economy, especially the housing market, and our continued risk discipline.”

“We are committed to both maintaining strong capital levels and returning more capital to our shareholders. In the second quarter we increased our common stock dividend 17% and repurchased 39.4 million shares. We remain dedicated to building long-term shareholder value, and I am optimistic about the future as we continue to focus on meeting the needs of our consumer, small business and commercial customers.”

John Mason, writing in The Street, says it is refreshing to read about a commercial banking giant whose focus is on actual banking business, rather than investment banking. While Wells Fargo does have an investment banking business, it is smaller than those of other financial intuitions. Its overall results are less dependent on investment banking.

TheStreet Ratings team give Wells Fargo a ratings score of “A” and rates it as a “Buy”.

Michael Corkery writes in the New York Times that investors are doubtful about Wells Fargo’s ability to keep up its earnings growth, especially after the last quarter, when its results were enhanced by non-recurring gains like a large tax benefit and hefty gains in its portfolio of stocks and private equity investments.