What You May Be Missing About Wells Fargo

The bad news has continued rolling in on the mortgage front. Mortgage applications are falling... fast. Wells Fargo  (NYSE: WFC  ) jumped out first and said it was cutting thousands of jobs in its mortgage department. JPMorgan  (NYSE: JPM  ) and Bank of America followed suit and said they're cutting jobs, as well. Heck, even Citigroup is letting some people go related to mortgage lending.

Clearly, this is bad news for banks. 

For confirmation, you don't have to look any further than Wells Fargo's second-quarter income statement. During the quarter, the bank raked in an impressive $2.8 billion from its mortgage operations. You can bet that won't continue in the quarters ahead.

But, if you're a bank investor, none of this should be new to you. We've now been talking about rising mortgage rates, and the drop in mortgage applications for months. And even before that, we knew that rock-bottom interest rates, and an epic boom in refinance activity, wasn't going to last forever. 

In all of the fuss over the mortgage-banking slowdown, what may be overlooked is the fact that there's a heck of a lot more to these banks than just mortgage lending -- even when it comes to U.S. mortgage leaders Wells Fargo and JPMorgan.

Let's just focus on Wells here for a minute. 

As I mentioned above, during the second quarter, Wells' total mortgage banking fee income was $2.8 billion during the second quarter. Total fee (and other non-interest) income at Wells for the quarter was $10.6 billion. Mortgage banking is a somewhat large fee contributor to Wells' business, but it's just one contributor among many. Plus, it's not like we're talking about mortgage-banking income going away completely -- just falling.

Digging deeper, we can also remind ourselves that Wells' overall business is a lot more than just consumer lending. At the end of the second quarter, Wells' balance sheet housed $253 billion in one-to-four family mortgage loans, and $439 billion in total consumer loans. But, it also had $189 billion in commercial and industrial loans, and $363 billion in total commercial loans. In all, Wells' balance sheet isn't far off from a 50/50 split between commercial and consumer. 

As long as we're thinking about the balance sheet, we might as well remind ourselves that that's where the other half of Wells' revenue comes from. Higher interest rates will push up what Wells has to pay to borrow money, but that's unlikely to rise as fast as the rates that the bank collects on the money that it lends. As that plays out, you'll end up with fatter interest spreads at Wells (yes, and most other banks, too). 

Add it all up, and I think we may be at a place that's advantageous to long-term investors. There's the clear, well-covered prospect of short-term pain as mortgage-banking fee revenue falls. But there's the longer-term benefit of wider spreads and more income from lending operations. I have no problem taking advantage of the market's short term bias... do you?

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