Wells Fargo's margins lag the industry by a quarter because the company recognizes loan sales when they actually occur, rather than when the new mortgage loan has its rate "locked," as most other large banks do. According to Staite, Wells Fargo's decline in first-quarter mortgage revenue "was due to lower volumes with WFC seeing a fall in correspondent origination which could be due to more competitive pressure." "Beyond Q2 we expect mortgage revenues to further decline due to lower refinancing volume across the industry," Staite wrote. The analyst expects Wells Fargo's "underlying revenues to decline by about 3% in Q2," and estimates the company will earn $3.74 a share this year, with earnings declining slightly to $3.73 in 2014. Staite has a "neutral" rating on Wells Fargo's shares. Franklyn Codel, Wells Fargo's head of mortgage production, participated in an industry forum hosted by Citigroup earlier this week. According to a summary of the forum provided to clients by Citigroup analyst Keith Horowitz, Codel is confident that the nature of Wells Fargo's business model is ideal even during a time of declining demand.
Paraphrasing Codel, Horowitz wrote that "WFC has a natural offset in falling commission expense as the sales staff is 100% commission-based . . . [and] he meets with his management team every 3 weeks to review potential staff and location reductions so that WFC is prepared to act quickly as volumes change." While that certainly presents quite a challenge to the mortgage lending staff, it is a great thing for the bottom line, since three weeks is a very quick reaction to changes in mortgage loan demand. Codel also said that there are other offsets that can mitigate declines in mortgage loan origination volume, including higher interest rates on loans held for sale, and "other WFC business levered to rising rates, such as community banking," according to Horowitz. WFC data by YCharts
Interested in more on Wells Fargo? See TheStreet Ratings' report card for this stock. -- Written by Philip van Doorn in Jupiter, Fla. >Contact by Email. Follow @PhilipvanDoorn