Wells Fargo Moves Ahead in Tough Year

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Wells Fargo (NYSE: WFC) is a San Francisco, California-based financial services company with $1.3 trillion in assets. It was established in 1852 and currently is the second largest bank in the United States by deposits, and largest by branches. 


Wells Fargo erected its position as a dominant player in the American mortgage market after reporting its twelfth consecutive quarter of earnings growth. The bank’s fourth quarter profit increased by 24% to $5.1 billion. The mortgage revenue for the bank increased by 30% to $3 billion.

The big banks were bailed out of the mortgage market in the aftermath of the financial crisis, but Wells Fargo penetrated into this sector and was able to achieve 3 times as much business as its nearest competitor.  One of the reasons for this could be the market, which contracted during the economic crash, taking in with it rivals of Well Fargo such as Indy Mac. Wells Fargo reacted quickly to fill that gap. Also in 2012, insurer MetLife quit the mortgage origination business.

Just like the other banks do, Wells Fargo also earns a profit by raising mortgage loans and then selling them in bulk to Fannie Mae and Freddie Mac, the government mortgage companies.  Wells Fargo kept $9.7 billion worth of first mortgages on its balance sheet. The company has forgone the opportunity of earning an additional $340 million by not passing it to government mortgage agencies, but it believes that the improving housing market and the economy make the bank’s decision worthwhile.

Wells Fargo turned out to be a more efficient and smarter lender than its peers. Of the total mortgages it serviced in the third quarter 7.32% are in delinquency or foreclosure, compared to the average 10.17 of the industry. Bank of America (NYSE: BAC) has more than 13% of servicing mortgage portfolio delinquencies or foreclosures. And JPMorgan Chase (NYSE: JPM) is at 10.7%. The ratio of Well Fargo was down to 7.04% in the fourth quarter.

The bank’s brokerage business increased its advice force at a time when other rival banks are cutting on advisers. The company added more advisors, which helped to expand the company’s client base. Unlike its competitors, Wells Fargo has proved its commitment to its wholesale and correspondent lending business. The bank is on its way to keep the relationship with mortgage brokers intact when other banks are closing it down.

Bank of America's shares have gained more than 78% over last year. For 2012, banks earnings per share $0.25. BAC's quarterly profit fell by about 63 percent on account of $5 billion of mortgage-related charges. In the fourth quarter, Bank of America axed 3,000 jobs in its mortgage servicing unit. The bank also shed 6,000, or 35 percent, of its contractors.

JP Morgan’s customer service score improved by 6% over 2011, which is behind smaller banks and credit unions but better than all the larger banks. Last year, the bank hired about 13000 employees, with most of them helping to process troubled mortgages. For the fourth quarter profits jumped 53 percent, beating analysts’ estimates.

Well positioned

The mortgage environment is expected to remain strong in fiscal 2013, despite the mortgage cliff. The management is not worried about the mortgage cliff due to its sizable service portfolio, balanced against its production, and low MSR valuation as of now, but can see an improvement with the rise of rate and related variable expense base.

The strategic plan of Well Fargo has led it to become America’s largest residential mortgage and residential institution. The U.S. housing market is recovering, and this turns out to be the positive sign for Wells Fargo as it is very well positioned to capitalize upon its continuous improvement.


For long term investors, Wells Fargo is a good stock destined to benefit from the recovery in the housing market. The company's focused management is assisting the bank to achieve its targets. Wells Fargo trades at a premium to its largest competitors and, importantly, is less subject to swings in its valuation.

The big banks in the U.S are disconnected from the Main Street economy because of their diversion towards global operations and high-end dealing. These big banks are earning profits, but the rest of the country is suffering. On the contrary, Wells Fargo turns out to be an old-fashioned, small-town bank, despite its massive size. With the recovery of American economy, more people getting jobs, their increased spending on buying cars and purchasing homes will make Well Fargo prosper.

With record earnings and sound management, Well Fargo is expected to grow further in 2013. But one of the major concerns is Net Interest Margin (NIM), which fell by 10 basis points in the fourth quarter to 3.56%. But management is confident that it will manage in the current interest rate environment.

For long term investors, Wells Fargo is offering increased dividends and increasing earnings from the house market recovery.

valuewalk has no position in any stocks mentioned. The Motley Fool recommends Wells Fargo. The Motley Fool owns shares of Bank of America, JPMorgan Chase & Co., and Wells Fargo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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