Wells Fargo reports 7% rise in profits due to refinancing boom

0 Comments | Deseret News (Salt Lake City), Jul 16, 2003 | by Bloomberg

Wells Fargo & Co., the biggest U.S. home lender and one of the largest banks in Utah, reported Tuesday that second-quarter profit rose 7 percent as the lowest mortgage rates on record extended a refinancing boom that began in April of last year.

Net income at the San Francisco-based bank increased to a record $1.53 billion, or 90 cents a share, from $1.42 billion, or 82 cents, a year earlier, the company said. Revenue rose 12 percent to $6.75 billion.

Wells Fargo chief executive officer Richard Kovacevich boosted home lending as the rate on a 30-year fixed-rate mortgage fell to a low of 5.21 percent in the period. Rival lenders reporting earnings Tuesday, such as FleetBoston Financial Corp. and Fifth Third Bancorp, also benefited from higher consumer lending.

"A lot of what's happening has been driven by the consumer," said James Thorne, who helps manage about $9 billion, including Wells Fargo shares, at M&T Bank Corp. "But when is corporate America going to come back and be risk-takers is the next question? In the next 16 months we should have a pretty good environment for that."

Wells Fargo shares fell $1.10, or 2.1 percent, to close at $51.93 Tuesday on the New York Stock Exchange.

Wells Fargo arranged $135 billion in new mortgages in the quarter, its highest ever. The company also took a $620 million write-down as the value declined of the mortgages that it services.

Income from lending rose 11 percent to $4 billion in the quarter and earnings from fees rose 14 percent to $2.7 billion. Mortgage banking fees surged 32 percent to $543 million. Credit card fees climbed 15 percent to $257 million.

The gain in Wells Fargo shares in the quarter lagged the advance in the Philadelphia Stock Exchange KBW Bank Index, reflecting investor concern that the mortgage boom has peaked.

Applications for U.S. mortgages fell in the first week in July by the most since October 2002 as a rise in rates crimped refinancing and slowed home purchases, according to a report from the Mortgage Bankers Association of America. Analysts estimate that as much as 20 percent of Wells profit comes from its mortgage business.

Fannie Mae and Freddie Mac, the two biggest U.S. mortgage buyers, forecast that refinancing would fall by at least half in 2004. Refinancing volume will drop to about $850 billion from $2.60 trillion this year, according to Fannie Mae. Freddie Mac said refinancing will decline to $1.18 trillion from $2.44 trillion.

"There's a greater probability that mortgage rates do increase over the next year," Kovacevich said in a telephone interview last week. "But even if mortgage rates rise, it will still be close to or at all-time lows." He said the part of the mortgage business unconnected to refinancing "will still be doing well even if you do have rising interest rates."

Commercial loans were unchanged at $47.6 billion. Credit card loans increased 13 percent to $7.6 billion, and consumer loans climbed 21 percent to $31 billion.

Wells Fargo set aside $424 million for bad loans, a 3.4 percent increase from a year earlier. The bank wrote off $550 million in loans, 3.2 percent more than a year ago. Loans not expected to be paid fell 6.5 percent to $1.56 billion.