DealBook: Wells Fargo’s Profit Prowess Shows Signs of Slowing

Photo A Wells Fargo branch in New York.Credit Shannon Stapleton/Reuters

Updated, 10:21 a.m. |

Even as Wells Fargo met Wall Street's expectations in the second quarter, there were signs that the bank's vaunted profit machine had slowed.

A metric of the bank's profitability was down from a year ago and mortgage originations continued to decline, while expenses rose from the first quarter.

Investors showed disappointment in the results, with the bank's shares dropping 1.37 percent to $51.28 in early trading on Friday.

Still, bank executives voiced confidence in the bank's ability to grow its overall loans in an improving economy.

"There are many indications that economic growth is accelerating,'' chief executive John G. Stumpf told analysts during a conference call on Friday.

The bank's earnings per share of $1.01 in the second quarter matched analyst's estimates, as surveyed by Bloomberg.

Wells Fargo said its profit rose 4 percent from the same period a year ago, to $5.7 billion. The bank's second-quarter revenue fell to $21.1 billion from $21.4 billion a year ago.

As the first large bank to report its second-quarter results, Wells Fargo will serve as the bellwether for consumer lending in the banking industry.

In recent quarters, analysts and investors have been heartened by Wells Fargo's ability to increase its loan portfolio, despite the tepid economy and slew of new consumer regulations. But they have been watching closely for signs of whether the bank is loosening its credit standards, as it searches for new business.

Wells Fargo avoided many of the crippling mortgage losses suffered by many large banks during the financial crisis, but its aggressive push into areas like auto lending show the bank's willingness to take risks that some other banks have avoided since 2008.

Auto loan originations totaled $7.8 billion in the second quarter, a 9 percent increase from the prior year.

The bank told investors at a presentation in May that its overall credit quality scores in auto loans have been increasing over several quarters.

There were others signs that Wells' profitability in the quarter had waned. Wells' net interest margin—which measures the difference between what a bank makes on lending and what it pays to its customers with deposits at the bank — was 3.15 percent, compared with 3.47 percent a year earlier and 3.20 percent in the prior quarter

Wells Fargo ranks as the nation's largest mortgage lender, and the spring home selling season was expected to bolster home loans from the first quarter. But home purchases this spring have been slower than many in the industry had hoped.

Indeed, mortgages taken out by consumers buying homes could not make up for the steep slump in mortgage refinancing activity at the bank and across the industry. Wells' mortgage originations fell to $47 billion from $112 billion a year ago.

Investors doubted whether Wells Fargo could keep up its earnings growth, especially after last quarter, when the bank's results were lifted by nonrecurring gains like a large tax benefit and strong gains in its portfolio of stocks and private equity investments.

Based in San Francisco, Wells Fargo has a track record for keeping down expenses, even as compensation soars at many of its Wall Street peers. Wells Fargo's efficiency ratio – a measure of the bank's attempts to keep manage costs – was 57.9 percent, in line with the first quarter.

The bank's results in the second quarter reflect improvement in the broader United States economy. Wells Fargo released $500 million in reserves, the same as the $500 million in the previous quarter.

Typically, a large release means that the bank is feeling more confident that losses on credit cards and other loans are likely to decline in a brightening economy.

In another sign of the brightening credit outlook, Wells Fargo said its write-offs on bad loans, or so-called net charge-offs, declined by $435 million from the second quarter a year ago to $717 million.

In the past, Wells Fargo's strong results have stood out from other global banks like JPMorgan Chase and Bank of America, which will report their results next week. One reason for its strong performance is that Wells Fargo depends far less on trading and other traditional Wall Street activities that are under pressure in the low-interest rate environment.

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