QE3 Downgrades Wells Fargo

NEW YORK (TheStreet) -- After Wells Fargo (WFC) predicted a significant net interest margin decline for the third quarter, and the Federal Reserve made its QE3 announcement, Stifel Nicolaus analyst Christopher Mutascio on Monday downgraded Wells Fargo to a "Hold" rating.

Speaking at the Barclays Capital Global Financial Services Conference last Tuesday, Wells Fargo CFO Tim Sloan said that although the company achieved a "stable" net interest margin during the second quarter, in part because of "a 7 basis point linked quarter benefit from higher variable items," the margin for the third quarter "could be similar to what we experienced in the third quarter of last year when our net interest margin was down 17 basis points."

A bank's net interest margin is the annualized spread between its average yield on loans and investments and its average cost for deposits and borrowings.

During the second quarter, Wells Fargo's net interest margin was 3.91%, unchanged from the first quarter, but declining from 4.01% in the second quarter of 2011, in line with most of the industry, which continues to face margin pressure as short-term rates remain near zero, and long-term rates also remain at historically low levels.

Wells Fargo had a good second quarter, with strong mortgage loan demand feeding net income applicable to common stock of $4.4 billion, or 82 cents a share, increasing from $4.0 billion, or 75 cents a share, the previous quarter, and $3.7 billion, or 70 cents a share, a year earlier. The strong mortgage loan volume for the industry follows President Obama's expansion in January of the Home Affordable Refinance Program, or HARP, under which qualified borrowers with loans held by Fannie Mae (FNMA) or Freddie Mac (FMCC), can refinance their entire loan balances at today's low rates, no matter how much the value of the collateral property has declined.

The Federal Reserve Open Market Committee on Thursday announced that the central bank would purchase "additional agency mortgage-backed securities at a pace of $40 billion per month," bringing its total mortgage-backed securities purchases to a pace of roughly $85 billion per month. The Fed also said that "exceptionally low levels for the federal funds rate are likely to be warranted at least through mid-2015." The target federal funds rate is currently at a range 0 to 0.25%.

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