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3 Reasons to Hate the Well Fargo Earnings Report

By John Maxfield - Apr 12, 2013 at 10:58AM

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While Wells Fargo's report was fantastic, it wasn't without flaws.

Excuse the headline for one second and let me start out by saying that Wells Fargo (WFC -0.26%) had an exceptional quarter. The nation's fourth largest bank by assets continued to consolidate its choke-hold over the domestic mortgage market and is making money hand over fist. For the three months ended March 31, Wells Fargo earned $5.2 billion, the highest quarterly profit in the bank's history. As chief financial officer Tim Sloan noted in prepared remarks, it was their "13th consecutive quarter of EPS growth and 8th consecutive quarter of record EPS."

So, what's to hate? Looking beyond the headline figures above, Wells Fargo's first quarter earnings reveal a number of headwinds confronting the industry.

First and foremost, Wells Fargo's mortgage origination volume dropped on both a linked quarter and year-over-year basis. Throughout the three months, the San Francisco-based lender underwrote $109 billion in mortgages. Was this impressive? Oh yes, yes it was. To give you some context, JPMorgan Chase (JPM -1.48%) the nation's largest bank by assets, originated only $52.7 billion worth -- and that was a 37% improvement over the same quarter last year.

The problem is that Wells Fargo has set the bar exceptionally high. In the first quarter of last year, its origination volume was $129 billion, and in the fourth quarter, it was $125 billion. Given this, the otherwise stellar $109 billion doesn't look quite as great. And on top of this, its mortgage application pipeline going into the second quarter was $74 billion, compared with $81 billion coming out of last year.

The good news on this front -- for first-time homebuyers anyhow -- is that the proportion of mortgage applications related to refinancing as opposed to purchase-money mortgages came down to 65%. It had previously been above 70% and, as such, had throttled the home-purchasing process for first-time buyers.

The second unfavorable aspect of Wells Fargo's otherwise great quarter was its net interest margin. Analysts have expected NIMs to continue their descent industrywide, the only question was how much they'd fall, and when they'll bottom out.

We now have the answer to the first question as it relates to Wells Fargo -- and, for that matter, JPMorgan. On a linked quarter's basis, its NIM fell by eight basis points, from 3.56% at the end of last year down to 3.48% at the conclusion of the first quarter. And on a year-over-year basis, Wells Fargo saw the figure drop by 43 basis points. The culprits were deposit growth, loan and asset repricing, and lower income from variable sources.

And the final negative thing to note was Wells Fargo's overall revenue, which declined by roughly $600 million on a sequential basis -- from $21.9 billion in the final three months of 2012, to $21.3 billion in the first three months of 2013. According to Sloan:

Revenue was down linked quarter largely due to the absence of the higher than average equity gains we recognized last quarter, the expected cyclicality in the mortgage business, and two fewer days in the quarter, which had a negative impact on both net interest income and noninterest income linked quarter trends.

So there you have it, another positive quarter in the bag for the nation's fourth largest bank. Were there disappointments? Sure. But overall, shareholders in this banking behemoth should be feeling very good about themselves right about now.

Next up are the results for Bank of America (BAC -1.23%) and Citigroup (C 0.93%), both of which report earnings next week. The big thing to watch, particularly for Bank of America, is whether its performance in the mortgage market will resemble JPMorgan's aggressive gains or Wells Fargo's cooling off. And in Citigroup's case, analysts will be glued to its top- and bottom-line figures, and specifically how much progress the lender has made at eroding its cost structure.

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Stocks Mentioned

Wells Fargo & Company Stock Quote
Wells Fargo & Company
$42.00 (-0.26%) $0.11
Bank of America Corporation Stock Quote
Bank of America Corporation
$34.45 (-1.23%) $0.43
Citigroup Inc. Stock Quote
Citigroup Inc.
$49.78 (0.93%) $0.46
JPMorgan Chase & Co. Stock Quote
JPMorgan Chase & Co.
$118.31 (-1.48%) $-1.78

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