This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Stocks Under $10 with 50-100% upside potential - 14 days FREE!

Wells Fargo Earnings: Rising Profits, Rising Pressure (Update 2)

Updated from 12:34 a.m ET to include fund manager comments and additional data throughout.

NEW YORK (TheStreet) -- Wells Fargo (WFC) on Friday reported its thirteenth straight rise in quarterly profits, exceeding expectations that the nation's top mortgage lender would see its profit fall on a slowing in refinancing activity.

Although Wells Fargo's rising profits may give some like the Warren Buffett's Berkshire Hathaway (BRK.A) -- the bank's largest shareholder -- continued confidence that its business model is diversified and closely aligned with a recovering U.S. housing market, the bank's earnings nevertheless highlight many long-standing concerns.

Fundamental strength at Wells Fargo is underscored by the bank's record $5.2 billion quarterly profit and a string of rising earnings that surpasses competitors such as JPMorgan (JPM), Citigroup (C) and Bank of America (BAC), highlighting the consistency of the bank's business model.

Those record earnings, however, don't put to rest concerns among analysts and investors regarding falling interest margins and the sustainability of earnings derived from mortgage refinancing.

As such, Wells Fargo may stand as the most prominent example of the challenges the banking industry faces in the low-interest rate environment created by the Federal Reserve.

The San Francisco-based lender reported better-than-expected earnings of $5.2 billion, on revenue of $21.3 billion, generally beating estimates of $4.75 billion and $21.5 billion respectively.

Adjusted first-quarter earnings of 92 cents a share beat the consensus estimate of 88 cents, according to analyst forecasts compiled by Bloomberg.

Wells Fargo shares fell less than 1% to $37.21 in Friday trading.

Bill Smead, head of investment manager Smead Capital, said a Friday drop in Wells Fargo's shares indicated the financial sector may have been overbought headed into first-quarter earnings.

While Smead said his fund is fully invested in financials and isn't buying Wells Fargo shares at this time, he remains optimistic the bank will continue to benefit from a rising economy and the prospect of dividend increases in 2013.

Investors mystified by Wells Fargo's consistent earnings growth to new records, and its relative share price underperformance over the past 12 months, need not look beyond a financial metric called net interest margin and a decline in mortgage banking income.

The bank's net interest margin -- the spread between the average yield on loans and investments and the average cost for deposits and borrowings -- fell 8 basis points to the lowest level in about eight years.

Chief financial officer Tim Sloan said on an earnings call that three basis points in the margin decline came from deposit inflows, while the rest of declines came from lower variable income and a re-pricing of loans on the bank's balance sheet.

Net interest income makes up roughly 50% of Wells Fargo's revenue. As higher yielding assets such as those picked up as part of the company's 2008 acquisition of Wachovia run off the bank's balance sheet, they are being replaced by assets carrying a much lower yield, pressuring overall margins.

Marty Mosby, a large cap banking analyst with Guggenheim Securities, said in an April interview prior to earnings that net interest margin declines of three-to-four basis points would signal a stabilization for Wells Fargo. Instead, margins fell more than expected to eight year lows of 3.48%.

Overall, the margin decline and a near 9% drop in mortgage banking revenue are the reason the shares traded off in the wake of record earnings.

Prior to earnings, Mosby said an earnings beat would hinge on flat mortgage banking earnings, were the bank to increase new home loans and end a program to hold some originations on the balance sheet. Wells Fargo, however, retained $3.4 billion in mortgage loans, forgoing approximately $112 million in revenue.

Evercore Partners analyst Andrew Marquardt forecast a 4 basis point NIM drop, and foresaw a 7% drop in mortgage revenue vs. declines in excess of 10% at other large cap banks such as JPMorgan.

Morgan Stanley analyst Betsy Graseck said in a client note that Wells Fargo's gain-on-sale margins could augur well for the earnings of SunTrust Bank (STI), while below-expectation trust asset growth could indicate headwinds for Bank of New York Mellon (BK), Northern Trust (NRT) and State Street (STT).

1 of 2

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
DOW 17,070.57 +91.44 0.54%
S&P 500 1,993.45 +6.94 0.35%
NASDAQ 4,531.1980 +4.7160 0.10%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs