The nation's largest mortgage originator and fourth largest bank by assets, Wells Fargo (NYSE:WFC), reported third-quarter earnings this morning. For those of you who own shares in the bank or are considering investing in it, don't be fooled by the market's reaction. That shares in the company are trading sharply lower today, down 3.4% roughly halfway through the trading session, proves nothing more than the age-old adage that no good deed goes unpunished.
Wells Fargo's strong third quarter
Analysts' one-dimensional expectations aside, Wells Fargo's top- and bottom-line performances were resoundingly strong. While total revenue was marginally lower relative to the second quarter -- coming in at $21.21 billion and $21.29 billion, respectively -- on a year-over-year basis, it increased an impressive 8%. Meanwhile, the bank's diluted earnings per share notched an eleventh consecutive quarterly increase, coming in at $0.88 per share, equating to a 22% gain over the same quarter last year.
Perhaps most impressive, however, was the California-based bank's second quarter 13.38% return on equity -- the crème de la crème of financial profitability metrics. While a 15% ROE is the traditional industry benchmark, analysts continue to speculate whether that level is attainable in the post-financial crisis era of increased regulations and ballooning capital requirements. For instance, the other too big to fail bank to report today, JPMorgan Chase (NYSE:JPM), reported a third quarter ROE of only 11.7%, and in the second quarter, Bank of America (NYSE:BAC), and Citigroup (NYSE:C) reported figures of 4.2% and 6.5%, respectively.
Three promising trends
Digging further into the numbers reveals three promising trends for both Wells Fargo and the economy as a whole. First, the bank did what all good banks do: It grew both loans and deposits. With respect to the former, total period-ending loans increased by 3% on a year-over-year basis. This was driven by a staggering $139 billion in home mortgage loan originations, equating to a 6% increase over the same quarter last year, and by a 9% uptick in business loans. With respect to the deposits, moreover, total core deposits increased by 6% over the same time period.
Second, credit quality improved on multiple fronts. Excluding the impact of new regulatory guidance, net charge-offs decreased sequentially by 19% and nonaccrual loans fell by 5%. Even more promising was the revelation that agency put-back requests related to the sale of faulty mortgages preceding the financial crisis decreased relative to the second quarter. As I've discussed in relation to Bank of America, these serve as arguably the single-largest current threat to the industry's bottom line.
Third, the bank's leadership has eschewed the irresponsible short-term approach to managing profitability favored by Wall Street analysts, choosing instead to lay the foundation for strong earnings going forward. Much of the disappointment underlying Wells Fargo's stock performance today relates to two things: its marginal, sequential decline in revenue, and the 25-basis-point decrease in the bank's net interest margin. Yet, the first is wholly a function of the lender's decision to retain high quality conforming loans on its balance sheet as opposed to realizing immediate revenue from selling them into the securitization industry and then purchasing the product, residential mortgage-backed securities, which yield markedly less than the underlying loans themselves. And the second is due in large part to faster than expected deposit growth in September and prudent liquidity management. Both factors, in turn, pave the way for monster profits going forward.
Don't be fooled by Wall Street
Early this morning, CNBC's Jim Cramer bashed Wells Fargo in his usual irresponsible manner, saying that he expected more from the bank and that its investors deserved answers. While pinning down the sultan of scream's uninformed expectations is an exercise in futility, Wells Fargo's second quarter-earnings release provided plenty of answers.
Make no mistake about it: Wells Fargo had a superb quarter virtually across the board. That traders are bidding its shares down, in turn, could only be viewed as a good thing for the enterprising investors, as its shares trade for a dear 1.35 times book value, nearly two-thirds higher than JPMorgan's valuation, and almost triple that of Bank of America and Citigroup.
The biggest value in bank stocks
While Wells Fargo is unquestionably the only big bank built to last, if you're looking to double or triple your money over the next five years, the bank stock that's best positioned to do so is Bank of America, the nation's second largest bank by assets. Before boarding this massive money train, however, check out our new in-depth report on Bank of America, which gives the reasons it could skyrocket as well as the risks associated with holding its stock. To view this report instantly, simply click here now.
John Maxfield owns shares of Bank of America. The Motley Fool owns shares of Bank of America, Citigroup, JPMorgan Chase, and Wells Fargo. Motley Fool newsletter services recommend Wells Fargo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.