Term Sheet

The latest on private equity, M&A, deals and movements — from Wall Street to Silicon Valley

Wells Fargo beats expectations even as home lending slows

April 12, 2013: 9:30 AM ET

Mortgage loans and profits fell at the nation's largest home lender.

wells_fargoFORTUNE -- The Wells Fargo wagon may be in for some bumps ahead.

On Friday, the nation's third-largest bank reported that its earnings had come in better than expected. Wells (WFC) earned $5.2 billion in the first three months of the year, up 22% from same quarter a year ago. That translated to per-share earnings of $0.92. Analysts had predicted $0.88.

That profit growth was less than at rival JPMorgan Chase (JPM), which also reported earnings on Friday morning. JPMorgan's bottom line rose by 33% in the first quarter from a year ago.

MORE: Should Wells Fargo have failed the stress test?

What's more, much of Wells' earnings growth came from the fact that the bank put less money away for future loan losses, not a jump in actual business. Profit at its huge mortgage unit dropped. All told, Wells Fargo's revenue came in at $21.3 billion, which was less than expected.

There were other signs of problems ahead. Analysts expect banks had a harder time finding borrowers in the first quarter, and are expecting loan growth, which has picked up recently, to drop off. Wells bucked that trend but only slightly. Lending rose but only by about $500 million, which was much less than it has in recent quarters.

But low interest rates means that Wells is making less money from those new loans. In all, the company said its net interest margin -- a closely watched measure of profitability for banks that tracks loan profitability -- dropped to 3.48% from 3.56% in the last quarter of 2012.

MORE: Investor frenzy over housing may be coming to an end

But perhaps the biggest disappointment was in Wells' mortgage unit. It has bulked up its mortgage unit in the past few years as other big banks have retreated from the home lending business. Wells now makes nearly one-in-three new home loans in the U.S. It benefited last year from a huge boom in refinancing, as home owners sought to take advantage of lower rates. Now that boom appears to be ending. The bank made $16 billion fewer new home loans compared to the last three months of 2012. What's more, profits from selling the loans it made to mortgage guarantors Fannie Mae and Freddie Mac dropped by $274 million.

Despite the jump in earnings, investors reacted with caution. Shares of Wells were down $0.54 to $36.97 shortly after the market opened.

Join the Conversation
About This Author
Stephen Gandel
Stephen Gandel

Stephen Gandel has covered Wall Street and investing for over 15 years. He joins Fortune from sister publication TIME, where he was a senior business writer and lead blogger for The Curious Capitalist. He has also held positions at Money and Crain's New York Business. Stephen is a four-time winner of the Henry R. Luce Award. His work has also been recognized by the National Association of Real Estate Editors, the New York State Society of CPA and the Association of Area Business Publications. He is a graduate of Washington University, and lives in Brooklyn with his wife and two children.

Email | @stephengandel | RSS
Current Issue
  • Give the gift of Fortune
  • Get the Fortune app
  • Subscribe
Powered by WordPress.com VIP.