More than the growth in mortgages with an unseemingly large market share, Wells Fargo was hit by the fact that it seems to be the only one defending treasuries even as yields run closer to 2% and its accretion in Deposits, close to double digit growth seems to have not brought down its cost of funds. Net income impressed with $5.1 bln in this quarter alone of which $3.1 bln came from spreads on first time mortgages and a few other mortgages (with only 12% from HARP)
The bank added another $125 B added to mortgages in the quarter and the accretion to loan book, well spread between Commercial loans ($9 bln) and Conforming first mortgages (another $8 bln) was also a plus to the bank’s efficient mortgage operations and resulted in the bank managing to impress with sequential growth in Profits ( Net Income) to $5.1 B and in Revenues of $21.9 bln which were higher sequentially by 2% despite a tougher quarter to December. However the bank is hit hard on its continuing decline in Net interest Margins and while the year average is a hot and heady 3.76% it was already down to 3.56% in the Fourth quarter.
The bank is one of the few with evenly spread Net Interest income and Non Interest Fee income pies and thus the continuing hit on NIMs is unlikely to be blown away despite the bank’s 120 mln shares bought back in the year more than a third of which were bought back in the fourth quarter.
While other retail franchises hoping to see a more sustained uptick after Q4 and full year results next week have been hit on the news as well, the quality of Fee Income is very different for Wells Fargo and is likely to hold it in good steed as about 25% is from mortgage charges and gains on sold mortgages (over and above losses booked) and less than 11% and 6% from retail banking and card fee & charges much hyped for the bank as one of its most expensive propositions nationwide.
Any clampdown on retail banking fee income and card fees is likely to hurt only Bank of America and probably Chase as others have more tenable prospects and Wells Fargo too has a different basket of Fee income. however the new investment Banking franchise has not yet taken off in key terms except in Debt Origination where the bank is in the Top 10 probably because of its appetite to warehouse such American/domestic debt.
The bank may thus improve its market outperformance once US yields start tracking down even as they currently head north to 2 %
The bank proved a full Year slate of $86 B and a Net Income of $18.6 b which comes to a heft y EPS hike of almost 20% from $2.82 per share last year to $3.36 per share for 2012 and ended 2012 with $945 B in Deposits and $800 B in Loans with a high ROE of 12.95% . It also added provisions of $644 mln for its $766 mln share of the foreclosure settlement which charges were unexpected 105 basis points instead of around 100 basis points expected by the market and competition at BofA is expected to add similar provisions of more thaan $2.5 b when it prints a positive report next eek to end 2012
The bank attributes its lower NIMs to aggressive Deposit growth as Loan yields are down to 4.58% with 55% of the Loans being retail (mortgages now being retained to keep better LCR and avoid rating hassles in selling them to the Government Sponsored Enterprises Fannie and Freddie. Also despite teh contention average cost of deposits has moved significantly south to 0.16% as most additional deposits were marked to short term fed funds sold
Wealth and Investment Fees share grew 8% leading the bank to claimsuccess for its small but growing Investment banking franchise
Operating Expenses were up 6% sequentially (Linked Quarter) but manageable at $12.9 bln . Salary and Variable compensation expenses seemed in control at 17% and 10.8% of Q4 revenues respectively. But the Cost Income Ratio overall is just under 60% long way away from a likely target of 55% for he bank despite its size.
Comparing to the US fiscal symptoms and slowdown
Auto Loans were the segment accounting for most of the degrowth in the December Quarter but were still a healthy looking $5.4 B. The Mortgage pipeline is also down 16% showing red signs for the incipient housing recovery as HARP that continues to make up most of the market’s expected volumes. HARP made only 1% of the bank’s $125 B in mortgages