Silver Lining for Wells Fargo on Mortgages: JPMorgan

NEW YORK ( TheStreet) -- Wells Fargo ( WFC) faces a huge decline in mortgage origination income, but nearly all of that decline will be offset by other mortgage items, according to JPMorgan Chase analyst Vivek Juneja.

Among the "big four" U.S. banks -- which also include JPMorgan Chase, Bank of America ( BAC)and Citigroup ( C) -- Wells Fargo has shined, with returns on average assets (ROA) rising steadily over the past four years, from 0.97% to 1.41%, according to Thomson Reuters Bank Insight. Over the same period, the company's return on average tangible common equity (ROTCE) has ranged from 16.32% to 16.95%. Here's how those numbers compare to the rest of the big four club:
  • JPMorgan's ROA has risen steadily from 0.58% in 2008 to 0.94% in 2012. Over the same period, the company's ROTCE has ranged from 10.66% to 14.80%.
  • Citigroup's ROA has ranged from a negative 0.08% to a positive return of 0.57% over the past four years. The company's ROTCE has ranged from a negative 1.50% to a positive return of 8.61%.
  • Bank of America's ROA over the past four years has ranged from a negative 0.09% to a positive return of 0.26%. The company's ROTCE has ranged from a negative 1.62% to a positive return of 4.46%.

Wells Fargo reported 2012 net income available to common shareholders of $17.999 billion, increasing from $15.025 billion in 2011. The main driver of the earnings growth was a remarkable increase in net mortgage banking revenue to $11.638 billion in 2012, from $7.832 billion the previous year. Net mortgage banking revenue includes loan origination fees, gains on the quick sale of new loans to Fannie Mae ( FNMA) and Freddie Mac ( FMCC), and loan servicing income, and is affected by adjustments to valuations of mortgage servicing rights, as well as provisions for mortgage repurchase claims from investors.

A major factor in Wells Fargo's mortgage loan origination growth last year was the Federal Housing Finance Agency's expanded Home Mortgage Refinance Program, or HARP 2.0, which allowed qualified borrowers with mortgage loans held by Fannie Mae or Freddie Mac to refinance their full loan balances, no matter how much the market value of the collateral home had dropped.

Loan refinance applications have been slowing this year, and the rise in long-term rates over the past two quarters has led to a decline in gain-on-sale margins for mortgage loans. This is a big deal for Wells Fargo and its shareholders. According to Juneja, Wells Fargo and Fifth Third Bancorp had "the highest share at 13%-14% of core revenues from originations," among the large-cap banks covered by his firm, during 2012. Wells Fargo is "the dominant player" in the U.S. mortgage market, with 25.4% of total market share in the fourth quarter.

Juneja esitmates Wells Fargo's mortgage origination fee revenue will drop to $8.042 billion this year from $12.200 billion in 2012, but he expects this decline to be mostly offset by other items. These include "1) about $1.2 bil increase in servicing revenues; 2) $0.7 bil decline in putback expenses; and 3) $1.6 bil - $1.7 bil reduction in origination expenses but with a lag," he wrote in a report on Friday.

Juneja expects the company's mortgage putback provisions - money set aside to cover repurchase demands from mortgage-backed securities investors - to decline to $1.225 billion in 2013 from $1.940 billion in 2012.

Factoring in all of the offsetting items, the analyst estimates that the net impact from the declining mortgage volume and gain-on-sale margins to Wells Fargo's 2013 bottom line will be between $334 million and $404 million.

Wells Fargo will kick off bank earnings season next Friday, with the consensus among analysts polled by Thomson Reuters being a first-quarter profit of 88 cents a share, compared to 91 cents in the fourth quarter, and 88 cents in the first quarter of 2012

Wells Fargo's shares closed at $37.42 Thursday, returning 10% year-to-date, following a have risen 27% return in 2012. The shares trade for 1.7 times tangible book value, and for 9.6 times the consensus 2014 EPS estimate of $3.89.

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.

Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for TheStreet.com Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.

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