SAN FRANCISCO --- Wells Fargo & Co., the largest U.S. home lender, reported a 24 percent rise in fourth-quarter profit as the bank made more money from mortgage banking and squeezed more income out of revenue.
Net income advanced to a record $5.09 billion, or 91 cents a share, from $4.11 billion, or 73 cents, a year earlier, the San Francisco-based bank said Friday in a statement. That beat the 89-cent average estimate of 27 analysts surveyed by Bloomberg, some of whom were excluding one-time costs tied to a regulatory settlement.
Chief Executive Officer John Stumpf, 59, has expanded in mortgages, where Wells Fargo originated nearly 1 in 3 as of September and used the biggest U.S. branch network to challenge JPMorgan Chase & Co.'s status as the most profitable bank. Wells Fargo, already No. 1 among all U.S. banks by market value, used deposits to lower its cost of funding and counter meager loan and security yields.
"Origination activity remains elevated and gain on sale margins are still relatively healthy" for mortgage lenders, RBC Capital Markets analyst Joseph Morford wrote in a Jan. 9 report. A Federal Reserve program to buy bonds and drive down interest rates has meant yields on mortgage-backed securities "remain compressed along with mortgage rates," he wrote.
A refinancing boom helped mortgage lenders originate $511 billion in the fourth quarter, according to the Mortgage Bankers Association, the Washington-based trade group. Originations hit $1.75 trillion for all of 2012, with 71 percent driven by homeowners retiring their old loans for new ones as interest rates hovered near record lows.
The bank told investors this week it's taking a $644 million pretax charge as part of
a settlement with regulators to end loan-by-loan reviews at 10 of the largest mortgage servicing firms and provide relief to borrowers. Wells Fargo agreed to pay $766 million in cash and provide another $1.2 billion in aid as part of the $8.5 billion accord. Mortgage servicers perform billing and collections and handle foreclosures.
Wells Fargo will ask Federal Reserve officials to let the bank return more capital to shareholders, Stumpf told investors in December. That's industry lingo for raising the dividend or buying back common stock. Wells Fargo already pays a quarterly dividend of 22 cents, yielding about 2.5 percent annually.
Above-average profits and strong "common equity levels should position it to be one of the better capital-return stories" in 2013, Morford wrote.
Wells Fargo gained 24 percent in 2012, trailing the 30 percent average for the 24-company KBW Bank Index. The stock added 3.6 percent this year through yesterday. Berkshire Hathaway Inc., controlled by billionaire Warren Buffett, is the biggest stockholder.
Banks could face lower profits on home loans this year as minutes of the Fed's December meeting, released Jan. 3, showed policy makers may end $85 billion monthly bond purchases in 2013. That could "spoil the party" for lenders that profited from a more than 20 percent jump in mortgage originations last year, according to Deutsche Bank.
Wells Fargo may be hurt more than other lenders because mortgage banking accounts for 13 percent of revenue, compared with an average of 8 percent at peers, Goldman Sachs Group Inc. analysts led by Richard Ramsden wrote in a Jan. 3 report. The analysts downgraded the stock from buy to neutral.
"While we still believe that WFC is uniquely positioned to take advantage of the refinance wave, exposure to mortgage banking should be less of a benefit," Goldman Sachs wrote, referring to the company by its stock ticker. "We forecast a gradual decline in mortgage-banking revenues."
The bank has been expanding its securities business, headed by John Shrewsberry, where competitors have scaled back or quit the market. In October, Wells Fargo restructured the sales and trading business to make it easier to serve clients, and in December beefed up its mortgage research with the hiring of Freddie Mac's Greg Reiter.