Wells Fargo optimistic about the economy

The bank, a bellwether for the mortgage and housing sectors, remains relatively upbeat despite the looming threat of rising rates.

By Jim J. Jubak Jul 12, 2013 6:47PM

It was never about last quarter's earnings. So while it was swell that Wells Fargo (WFC) beat Wall Street earnings estimates for the second quarter by 5 cents (at 98 cents a share) in results reported after the close on Thursday, the real good news came in Friday's relatively upbeat conference call -- in remarks about next quarter and the remainder of 2013.

The bank, a bellwether for the mortgage and housing sectors, said that, looking forward, it remained optimistic on the economy. Higher interest rates would indeed cut into mortgage originations and mortgage lending volumes would be down in the third quarter -- directionally that is what investors expected to hear -- but the deterioration described by the company didn't sound too scary.

Mortgage originations in the third quarter would decline, the bank guessed, to the vicinity of $100 billion versus $112 billion in the second quarter. (The $112 billion for the second quarter was up from $109 billion in the first quarter of 2013.)

Toy house sitting on money © Vstock, Tetra Images, CorbisOther metrics that had worried Wall Street going into the earnings report and the conference call got the same combo treatment of downward trend, but not at a scary pace. For example, the bank said that net interest margins would probably be under pressure in the third quarter, but that over a longer period it would be able to grow net interest income. (Net interest margins fell 2 basis points to 3.46% in the second quarter.)

Absent deterioration in the U.S. economy, Wells Fargo said, it would be able to continue to release reserves against bad loans (adding to the bottom line in the process.) In the second quarter, provision for credit losses fell by $306 million and the quarter included a $35 million release from reserves. (When a bank adds to its loan loss reserves, it comes out of earnings. When it releases money from its loan loss reserves that flows through to earnings.)

This isn't to say that everything was hunky dory in the quarter to June 30. Growth in commercial loans slowed to just 1.7% from the first quarter of 2013, and the runoff in the home equity loan portfolio continued with a drop of 3.4%. One worry that the quarter didn’t put to bed: The margins on gain on sale for mortgages fell 35 basis points. (A bank books a gain on sale when it sells a mortgage asset at a profit to investors. Selling mortgages that a bank has originated is essential to free up capital for new mortgage lending.) Wells Fargo did say in the conference call  it expected gain on sale margins to fell from current levels in the second half of 2013.

In short, nothing here to suggest a speedy run to the exits, but it is clear that a environment of rising rates will be tough on bank profits.

Shares of Wells Fargo were up 2.1% as of 2 p.m. New York time Friday. Shares of home-builders Lennar (LEN) and Pulte Group (PHM) were down 0.9% and 0.8%, respectively.

Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. When in 2010 I started the mutual fund I manage, Jubak Global Equity Fund, I liquidated all my individual stock holdings and put the money into the fund. The fund did not own shares of any stock mentioned in this post as of the end of March. For a full list of the stocks in the fund as of the end of March see the fund’s portfolio.

MSN Money on Twitter and Facebook

Like us on Facebook: MSN Money and Top Stocks

Follow us on Twitter: @msn_money and @topstocksmsn

Jul 13, 2013 11:02AM
Oh la de dah. So let's get this straight. WFC thinks everything is hunky dory because they're getting US taxpayers funding at 0% to loan money to US taxpayers at 4% while paying US taxpayers 0.05% for their deposits and savings while charging them 16% on credit cards. JPM, WFC and the rest of the TBTF banks are shysters.  Their greed screws up the US economy destroying trillions in RE assets, putting millions out of work and have their hands out for bail outs from the taxpayers they screwed, Those banks should've been nationalized in March, 2009 and their officers put in jail for embezzlement and fraud. Screw the banks and insurance companies along with Wall Street hedge funds.
Please help us to maintain a healthy and vibrant community by reporting any illegal or inappropriate behavior. If you believe a message violates theCode of Conductplease use this form to notify the moderators. They will investigate your report and take appropriate action. If necessary, they report all illegal activity to the proper authorities.
100 character limit
Are you sure you want to delete this comment?


Copyright © 2014 Microsoft. All rights reserved.

Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.


StockScouter rates stocks from 1 to 10, with 10 being the best, using a system of advanced mathematics to determine a stock's expected risk and return. Ratings are displayed on a bell curve, meaning there will be fewer ratings of 1 and 10 and far more of 4 through 7.

123 rated 1
262 rated 2
480 rated 3
651 rated 4
649 rated 5
629 rated 6
616 rated 7
496 rated 8
346 rated 9
111 rated 10

Top Picks

TAT&T Inc9



Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.

Contributors include professional investors and journalists affiliated with MSN Money.

Follow us on Twitter @topstocksmsn.