Despite Tough Earnings Climate, Wells Fargo Tops JPMorgan

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“I think banks will be relatively optimistic on 2014,” Bernstein analyst Brad Hintz told MarketWatch ahead Tuesday’s earnings report release from JPMorgan Chase (NYSE:JPM) and Wells Fargo (NYSE:WFC), announcements that kick off the banking earnings season. “They are getting an idea where the regulators are pushing them, they know what they have to do.”

Plus, the worldwide markets are recovering, Europe appears to be recovering, and the Chinese government has started to address its financial problems, he said. “We would expect forward guidance to reflect some cautious optimism about fundamental trends for the coming year,” Credit Suisse analyst Moshe Orenbuch said in a research note, per MarketWatch.

There was also reason for banks to be optimistic about 2013. While JPMorgan reported that fourth-quarter profits slid 7.3 percent year over year, the bank did manage to beat analyst expectations. No such slowdown in profits marred Wells Fargo’s results. Even though the bank’s lucrative mortgage business weakened over the three-month period, Wells Fargo posted a better-than-expected 10 percent increase in net income, with results benefiting from strong expense controls and a continued improvement in loan credit quality.

Net income increased from $5.09 billion in the fourth quarter of 2012 to $5.61 billion in 2013. In addition, the bank earned $1 per share, which compares with the 91 cents per share recorded the year before. Still, revenue did slide 5.8 percent, to $20.67 billion. Analysts polled by Thomson Reuters had predicted per-share earnings of 98 cents on revenue of $20.69 billion.

Results for 2013 suggest that Wells Fargo was one of the most profitable of the United States’ big banks. The company also shows the degree to which the U.S. economy is improving: The institution is a large commercial bank that is less diversified internationally and by business lines as some of its competitors. For the full year, the bank, which is the fourth largest in the U.S. by assets, reported its fifth straight year of profit growth and its fourth consecutive year of record earnings.

Net income rose to $21.88 billion in 2013, with the San Francisco-based bank earning more than JPMorgan for the first time since 2004. Comparatively, JPMorgan had an annual income of $17.92 billion. It is important to remember that because Wells Fargo did not expose itself to as many risks during the housing bubble era as its rivals and it has to face far less regulatory scrutiny than banks with significant investment banking and trading businesses, it could post strong quarterly results despite the hard revenue climate.

“Wells Fargo had another outstanding year in 2013, including strong growth in loans and deposits, and double-digit growth in earnings,” said Chairman and CEO John Stumpf in the firm’s earnings press release. “In the five years since our merger with Wachovia, we have grown our businesses, invested in our franchise’s future and contributed to the U.S. economy’s recovery.”

Equally impressive as Wells Fargo’s performance was its profit growth given the rising interest rates. The bank is the largest mortgage lender in the U.S., making it a bellwether of the country’s housing market.

Mortgage lending helped boost the institution’s profits for years, but last year, when the refinancings began to slow as interest rates climbed, Wells Fargo had to look for a new source of revenue — or at least cut expenses. In the fourth quarter, mortgage originations fell to $50 billion from $125 billion in the year-ago quarter and $80 billion in the third quarter of 2013. However, Wells Fargo’s home loan business remained much stronger than its refinancing business.

Still, the institution has cut jobs to trim costs and deflate the size of its mortgage operations. In the second half of 2013, Wells Fargo eliminated about 6,200 jobs related to its mortgage business, and the move was believed to help fourth-quarter results, according to Evercore analyst Andrew Marquardt, who spoke to MarketWatch.

Additionally, total loans made by the bank in the fourth quarter increased by $13.5 billion sequentially to $825.8 billion, while loans grew $10.4 billion in the third quarter. Helping the strength of Wells Fargo’s loan business is the fact that credit is improving; credit is improving financial results of banks throughout the industry.

That improvement led Wells Fargo to record a credit loss provision of $363 million, 80 percent below year-ago levels. As a result, the bank was able to release $600 million from its reserves of cash that had been kept on hand to cover loan losses. Comparatively, $250 million was released in the year-ago quarter and $900 million in the third quarter.

Together, the six largest banks in the United States, including Wells Fargo, generated higher earnings in 2013 than in any year since 2006. That milestone was hit even though these six banks paid out around $18.7 billion to settle allegations of financial misdeeds ranging from violations of the Banking Secrecy Act to misrepresentations of the quality of mortgage-backed securities sold to investors.

Net income for that group of six banks rose 21 percent to $74.1 billion, according to analyst estimates compiled by Bloomberg. A combination of deliberate management strategies like cost-cutting measures, the roaring stock market rally, and the dissipation of crisis-era burdens like the decline in bad loans made 2013 a profitable year for the banking industry. Only the $84.6 billion earned by these six banks in 2006, when the U.S. housing bubble was at its peak, ranks higher.

Shares of Wells Fargo, which advanced 33.88 percent in 2013, fell 0.5 percent to $45.35 in premarket trading after the results were released.

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