Wells Fargo's (WFC) mortgage business boosted its second-quarter profit to a record $4.6 billion, and executives said Friday that they are counting on the home lending division to buoy it in the immediate future.
But mortgages are only one reason Wells Fargo executives are relatively upbeat. In an interview Friday, Chief Financial Officer Timothy Sloan discussed four factors working in the San Francisco bank's favor.
1. Happy housing days are here again — for now.
Wells Fargo signed up $102 billion of mortgage business in the second quarter, as low interest rates and government programs encouraged homeowners to refinance their mortgages. Sloan says that pipeline bodes well for the third quarter's upcoming results, although he was cautious about looking too far ahead.
"The important thing to remember is the mortgage business is a very cyclical business, and it's particularly cyclical in periods where a disproportionate amount comes through refinancing, since that tends to be more rate-oriented, than economic-oriented," Sloan says.
"The good news for us is the pipeline closed at $102 billion, and so we should have a pretty strong quarter this quarter. Beyond that we don't know. It's just as likely that we'll continue at this pace, as you could come to the end of the refi boom," he adds.
2. Buying Wachovia is finally paying off.
Now that Wells Fargo has fully integrated Wachovia Bank, purchased in 2008, the bank has freed up additional resources. Credit card penetration among customers rose to 31% from 29.9% a year earlier, and Wells posted record auto loan originations of $6.6 billion in the second quarter, up 18% from the prior year.
"It took a lot of time and effort to train people and convert stores," says Sloan. "One of the reasons why we're seeing good growth in our consumer business is folks have more time in their day to focus on customers."
"Cross-sell is a very, very time consuming and difficult process," he adds. "It's not sexy. It's boring, but that's ok."
3. European bank clouds have American bank silver linings.
Wells Fargo completed two large domestic loan portfolio acquisitions from European banks in recent months, and Sloan says it is open to doing similar deals.
"When you look at the loan portfolios, and actually most of the business purchases, over the last year, most of them have come from European banks or regulators," he says. "For the most part they've been domestic portfolios, and that's the primary focus."
"The expectation is that we'll continue to see loan portfolio and businesses owned by European banks continue to become available because of changes occurring in the financial services industry in Europe," Sloan adds. "My expectation is we'll continue to see more opportunity from European banks."
4. It's not always "All About the Benjamins" — sometimes it's about the ratios.
Wells Fargo has moved away from earlier projections that it would cut expenses to $11.25 billion or lower by the fourth quarter this year. Instead, the bank is telling investors that it's focusing on an expense efficiency ratio, rather than a particular dollar figure.
"We provided the guidance of an expense efficiency ratio of 55% to 59% at Investor Day, and we think that's the right longer-term way to think about our progress," says Sloan. "The drivers were that our revenues are higher than we thought they were going to be when we set the dollar range a year ago."
Should the current refi boom start to slow, Sloan says the bank should be fairly able to trim some of its additional expenses quickly.
"We think that our mortgage folks are really good at adding and subtracting folks when we're going through these booms and declines," he says. "There's always going to be a little bit of a lag, but we always want to keep that lag short to match expense as closely to revenue as possible. There's usually a 30, 60, 90 day lag once you see a peak in market and when you need to start reducing expenses."