Bloomberg -- Wells Fargo & Co., the largest U.S. home lender, said third-quarter profit climbed 13% to a record as fewer loan defaults and lower expenses helped overcome weakness in mortgage lending.
- Read more: Wells Fargo Brokerage Slows in Q3
Net income advanced to $5.58 billion, or 99 cents a share, from $4.94 billion, or 88 cents, a year earlier, the San Francisco-based company said today in a statement. The average estimate of 33 analysts surveyed by Bloomberg, excluding some items, was 97 cents a share.
Chief Executive Officer John Stumpf, 60, is releasing loan- loss reserves set aside in earlier quarters as an improving economy and rising home prices make it easier for borrowers to repay. Wells Fargo cut thousands of mortgage jobs during the quarter to counter a slowdown in home-loan refinancings, which had helped drive three straight years of record profit.
"The combination of lower credit costs and noninterest expense is enough to overwhelm a significant decline in mortgage origination revenues," John McDonald, an analyst at Sanford C. Bernstein & Co. in New York, wrote in a Sept. 30 report. McDonald rates the shares to outperform and predicts the stock will reach $46 within the next 12 months.
Chief Financial Officer Timothy Sloan, 53, told analysts last month that mortgage originations and profit margins on selling home loans would fall in the third quarter. Borrowers were discouraged as interest rates rose amid speculation that the Federal Reserve would pare its efforts to stimulate the economy with low rates.
Ten-year Treasury yields, which are used to set rates for some consumer loans including mortgages, rose from this year's low of 1.63% on May 2 to 3% on Sept. 5. Mortgage refinancing applications, which accounted for 82% of all requests for home loans last year, made up 63% in the third quarter, according to data compiled by the Mortgage Bankers Association.
Expense cuts at Wells Fargo are starting to take hold. The company said in July 2011 it would take out $1.5 billion in quarterly costs, then backtracked a year later to pursue higher mortgage revenue. The bank has since renewed the effort as home borrowing waned, announcing at least two rounds of job cuts totaling more than 4,800 workers.
Wells Fargo employed about 274,000 people at midyear, the largest workforce among domestic lenders.
U.S. banks are still facing fallout from bad loans made before the housing crash. Wells Fargo announced Sept. 30 it had agreed to an $869 million settlement with Freddie Mac to resolve disputes over loans sold to the government-backed firm before Jan. 1, 2009. Within days, the bank was sued by New York state Attorney General Eric Schneiderman over claims the lender didn't uphold terms of a $25 billion mortgage-servicing settlement in February 2012.
Wells Fargo's stock climbed 21% this year through yesterday, trailing the 23% gain in the 24-company KBW Bank Index.
Out of 42 analysts who cover the stock, 19 gave the equivalent of a buy rating through Oct. 10, according to data compiled by Bloomberg. It's the fourth straight month the percentage stood below 46%. Before that, the tally hadn't dropped below 48% since the month ending Oct. 14, 2009, when the equivalent of two out of five analysts recommended buying the stock.
JPMorgan Chase & Co., the biggest U.S. bank by assets, reported a third-quarter loss of $380 million today. Bank of America Corp., Citigroup Inc., Morgan Stanley and Goldman Sachs Group Inc. are set to release results next week.
Most of the largest U.S. banks are still struggling to show increased revenue amid still-narrowing lending margins, borrowers cutting debt levels and weak volumes in bond-trading. The six largest U.S. lenders probably will report revenue of $100.9 billion for the quarter, a 3.4% decline from a year earlier, according to analysts' estimates compiled by Bloomberg through Oct. 7.
Wells Fargo has countered the lack of growth by buying loan portfolios from other banks and investing in securities with higher yields. The firm agreed in August to buy commercial property loans from ING Real Estate Finance (USA) LLC with balances of $1.6 billion.
Stumpf has raised the dividend twice this year and included more stock buybacks in the capital plan it must submit each year to the Federal Reserve.