Wells Fargo Profit Rises Despite Drop in Revenue

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A Wells Fargo branch in New York.Credit Shannon Stapleton/Reuters

Updated, 7:41 p.m. |

Wells Fargo said on Friday that its earnings rose 4 percent in the second quarter, but there were signs that the bank’s vaunted profit machine was slowing.

A metric of the bank’s profitability fell from a year ago, while mortgage originations declined after a less than stellar home selling season across the United States.

Still, bank executives voiced confidence in the bank’s ability to increase its lending in an improving economy.

“There are many indications that economic growth is accelerating,’’ the chief executive, John G. Stumpf, told analysts during a conference call on Friday.

The bank’s earnings per share of $1.01 in the second quarter matched the average of analysts’ estimates as surveyed by Thomson Reuters.

Wells Fargo said its profit for the quarter rose to $5.7 billion, but second-quarter revenue fell to $21.1 billion from $21.4 billion a year ago. Shares of Wells Fargo slipped 0.6 percent, closing at $51.49.

As the first large bank to report its second-quarter results, Wells Fargo will serve as a bellwether for consumer lending in the banking industry.

In recent quarters, analysts and investors have been heartened by Wells Fargo’s ability to increase its loan portfolio, despite the tepid economy and a slew of new consumer regulations. Wells Fargo avoided many of the crippling mortgage losses that many large banks suffered during the financial crisis, but its aggressive push into areas like auto lending has prompted analysts to question whether the bank is willing to take more risks.

The bank’s auto loan portfolio rose 11 percent from the previous year, to $54.1 billion. The bank told investors at a presentation in May that its overall credit quality scores in auto loans had been increasing over several quarters.

One sign that the bank’s profitability waned in the quarter was a drop in its net interest margin, the difference between what a bank makes on lending and what it pays to customers with deposits at the bank. The net interest margin was 3.15 percent, compared with 3.47 percent a year earlier.

Bank officials said they expected the net interest margin to rise when interest rates rose from their historically low levels.
Wells Fargo is the nation’s largest mortgage lender, and the spring home-selling season was expected to bolster home loans from the first quarter. While originations increased from the that quarter, home purchases this spring were slower than many in the industry had hoped.

“The purchase market is softer than we thought it would be,’’ the bank’s chief financial officer, John Shrewsbury, told analysts in a conference call.

Mortgages taken out to buy homes could not make up for the steep slump in mortgage refinancing at the bank and across the industry. Wells’s mortgage originations fell to $47 billion from $112 billion a year ago.

The bank said its mortgage executives had also been meeting with federal housing officials to discuss credit standards at Fannie Mae and Freddie Mac. The bank said it had obtained more clarity about the risks that its mortgages could be put back by the government-sponsored entities in case of default. Banks like Wells are starting to extend more mortgages as they understand the potential risks better.

“It is important to our customers, to our shareholders and to America,’’ Mr. Stumpf said in an interview.

Investors doubted that Wells Fargo could retain its earnings growth, especially after last quarter, when the bank’s results were helped by nonrecurring gains like a large tax benefit and strong returns in its investment portfolio.

Based in San Francisco, Wells Fargo has a track record of keeping down expenses, even as compensation soars at many of its Wall Street peers. Wells Fargo’s efficiency ratio — a measure of its attempts to manage costs — was 57.9 percent, in line with the first quarter.

“They are already one of the best in the industry when it comes to keeping expenses low,’’ said Shannon Stemm, a banking analyst with Edward Jones. “The downside of being the best is that they don’t have a lot more levers to pull.’’

The bank’s results in the second quarter reflected improvement in the United States economy. Wells Fargo released $500 million in reserves, the same amount as in the previous quarter.

Typically, a large release means the bank is feeling confident that losses on credit cards, mortgages and other loans are likely to decline in a brightening economy.

In another sign of the improving credit outlook, Wells Fargo said its write-offs on bad loans declined 13 percent from the first quarter, to $717 million.

In the past, Wells Fargo’s strong results have stood out from other global banks like JPMorgan Chase and Bank of America, which are to report their results next week. One reason is that Wells Fargo depends far less on trading and other traditional Wall Street activities that are under pressure when interest rates are low.