Wells Fargo's Profit Rises for 13th Straight Quarter (Update 1)

  • Wells Fargo reports a first-quarter profit of 92 cents a share, beating the consensus estimate of 88 cents, according to data compiled by Bloomberg
  • Excluding special items, net income was $5.2 billion, beating the consensus estimate of $4.75 billion.
  • Net revenue came in at $21.3 billion, slightly below an estimate of $21.5 billion.
  • Mortgage banking earnings of $2.8 billion, down from $3.1 billion in the fourth quarter.
  • Net interest margin fell 8 basis points to 3.48%, missing most estimates.
  • The firm repurchased approximately 17 million shares of common stock in the quarter.

Updated from 8:20 a.m. ET with early market reaction and additional commentary.

NEW YORK ( TheStreet) -- Wells Fargo ( WFC) beat first quarter earnings expectations as the nation's fourth largest bank by asset was able to grow earnings for a thirteenth consecutive quarter.

Consensus was that the lender would see a slight sequential drop-off in earnings for the first time since the worst of the financial crisis, as a 2012 mortgage refinancing boom petered out. Wells Fargo's record earnings surpassed estimates, as the firm saw net charge-offs on loans fall to the lowest level since the second quarter of 2006.

Falling interest margins and declining mortgage banking revenue remain a concern, however. Meanwhile the bank's earnings benefitted from one-off items such as reserve releases.

The San Francisco-based lender reported better than expected earnings of $5.2 billion, on revenue of $21.3 billion, beating adjusted 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.

Shares in Wells Fargo fell less than 21% in Friday trading to $37.21, putting the bank's 12-month stock gains of over 10%, excluding dividends, below gains of just under 14% from on the S&P 500 Index.

"Our company earned $5.2 billion in first quarter 2013, the highest quarterly profit in our history--another milestone demonstrating how Wells Fargo's diversified business model continued to produce outstanding results," said Chief Financial Officer Tim Sloan, in a press release.

In its first-quarter earnings report also released on Friday, JPMorgan ( JPM) reported a record profit of $6.5 billion, increasing 16% from the fourth quarter.

Wells Fargo's first-quarter 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, missing estimates.

The bank also retained $3.4 billion in mortgage loans, forgoing approximately $112 million in revenue had the bank sold off the loans to investors in the quarter, in a move that stabilizes interest margins.

Marty Mosby, a large cap banking analyst with Guggenheim Securities said in an April interview that net interest margin declines of 3-4 basis points would signal a stabilization for Wells Fargo. Meanwhile, the analyst said an earnings beat would hinge on flat mortgage banking earnings, were the bank to increase loan originations, and end a program to hold them on the balance sheet.

Overall, the bank originated $109 billion in home loans, a second consecutive quarterly drop. Applications of $140 billion and a pipeline of $74 billion also reflected quarterly declines.

Wells Fargo also will have less room to grow earnings from one-off items such as reserve releases and falling net-charge-offs, given near record low levels reported on Friday. Still, an efficiency ratio of 58.3%, at the high end of the bank's projections, indicates one area of the bank's bottom line that could improve in coming quarters.

Improvements to Wells Fargo's balance sheet, however, may have run their course in providing savings to benefit bottom-line earnings.

Net charge-offs of $1.4 billion represented about a 40% drop from year-ago levels as the rate fell to a post-crisis low of 0.72%. The bank released $200 million in reserves and reported non-performing assets of $22.9 billion, an over 13% drop from the first quarter of 2012.

"While the quality of the beat will be contested, we believe estimates should hold up given that credit is already much better than our existing model," Ken Usdin, a Jefferies analyst wrote in reaction to Friday's earnings announcement.

For more on Wells Fargo's earnings expectations, see why a steak of rising earnings poses a hidden opportunity for investors.

Also see why Moody's says Wells Fargo's burgeoning buyout business is a risk to the bank's sterling credit rating.

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-- Written by Antoine Gara in New York