falling interest rates
to stick another feather in
(WFC - Get Report) cap.
The bank, already an investor favorite, boasts a substantial mortgage book that should grow even more lucrative as rates fall and consumers refinance their loans to take advantage. That trend could substantially boost earnings in coming quarters, analysts and investors say.
Wells Fargo, which operates the largest retail mortgage origination business in the country, has already seen a spike in
contribute to earnings in the most recent quarter. The bank, which was one of the few to post solid gains in the fourth quarter, realized $109 million in mortgage revenue in the fourth quarter alone.
Jim Bradshaw, banks analyst at
D.A. Davidson in Portland, Ore., estimates profits could reach $450 million next year, and possibly more if rates come down more than expected. We're "just expecting another 50 basis points" in rate cuts, the analyst says. "If we're wrong and mortgage rates dip down to the low 6's, we could see a more significant wave of refinancing." (Bradshaw rates Wells outperform and his firm has not done underwriting for the bank.)
Mortgage Refinancing Boom
Refinancings as a percentage of total mortgage originations have jumped to 55.5% at the end of January from 39.87% a month earlier, says Michael Grondahl, senior specialty finance analyst at
U.S. Bancorp Piper Jaffray
. Lower rates "will drive heightened real estate activity through 2001, weighted toward the beginning of the year due to strong refinance activity," says Grondahl.
A list of other financial companies stand to benefit as well from the flurry of mortgage activity, including
(WM - Get Report)
Golden State Bancorp
(GSB - Get Report)
And falling rates create a favorable macro environment for mortgage finance stocks such as
as well as title insurers including
Fidelity National Financial
, which are "thriving on high mortgage refinance volumes," says Grondahl.
also reports a sharp uptick in refinancing demand.
Doing Well at Wells
For Wells, says
analyst Campbell Cheney, the mortgage business is just as important as a jumping-off point for selling other financial products, the real force of Wells' sales-driven culture, he says. "It's a nontraditional banking culture," says Cheney. "They'd rather have the current customer buy eight products" than try to find new customers, he says. (He rates Wells accumulate and his firm has no underwriting relationship with the bank.)
Indeed, Cheney points out that the mortgage business is the bank's third-largest business segment, after community and wholesale banking. Where mortgage origination made up roughly 10% of profits in the latest quarter, community banking (which includes products like checking and savings accounts and CDs) made up more than 60%. "What drives this company is earnings in the retail bank."
Analysts also praise Wells Fargo's track record on acquisitions. In 2000, the bank made about a dozen acquisitions, while its 1998 merger with Minnesota-based Norwest continues to proceed smoothly. "They took a very long view" of the Norwest deal, says Bradshaw. "They didn't try to rush the merger integration process. They took two-plus years to combine the two companies." In the latest quarter, Wells said it reversed a $58 million reserve that had been set aside to cover severance charges as the bank found positions for those initially slated for dismissal.
Cheney adds that Wells' reputation is such that the company is often the preferred suitor of smaller banks that want to sell, such as
National Bank of Alaska
in the past year. Wells has shown it will do "acquisitions of all sizes, from the smallest community banks to the largest," Cheney says. "They are not turning down community banks because they are too small." Cheney notes the recent acquisition of relatively small
North County Bancorp
in San Diego, one of Wells' submarkets.
To be sure, a recent survey from the
on bank lending practices indicates conditions have tightened up noticeably on the consumer side as banks grow increasingly concerned about the economic outlook. The Fed survey indicates that roughly 15% of banks surveyed expect to tighten standards on consumer loans by the end of the year, assuming the economy grows at a sustainable rate.
And the fourth quarter wasn't completely sunny at Wells Fargo, as the bank found it difficult to completely sidestep the kind of bad loans that have clouded other banks' results. Nonperforming loans jumped 23% to $1.2 billion in the third quarter. Of that increase, $122 million, or more than half, came from a single client, while $33 million was from acquired banks and $68 million could be chalked up to general economic slowing, according to a research note from
However, the bank's loan loss reserve "remains one of the strongest in our universe," Warburg wrote. And industrywide, mortgage lending has proved resilient, with banks reporting no change in standards or demand for residential mortgage loans. Meanwhile 35% of banks said demand for "all types of consumer loans had weakened somewhat in the last three months."