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Mortgage Applications Boost Wells Fargo Results

by Christina Rexrode
Friday Jul 13, 2012

Wells Fargo's net income and revenue rose in the second quarter, driven by a pickup in lending and a decline in the amount of bad loans.

The San Francisco-based bank reported an 18 percent increase in net income Friday, to $4.4 billion, compared with $3.7 billion in the same period a year ago.

On a per-share basis, the bank earned 82 cents, in line with estimates of analysts polled by FactSet. Revenue of $21.3 billion was also in line with analysts' expectations.

The past two months have been vicious for the broader banking industry, which has been hit by accusations of interest-rate fixing, downgrades by the Moody's ratings agency, and a surprise trading loss at JPMorgan Chase. Wells Fargo has largely managed to avoid those problems. Its own earnings announcement was overshadowed by JPMorgan, which started a two-hour conference call at 7:30 a.m. to explain its $5.8 billion trading loss to analysts and investors.

Industry analysts raised their estimates for Wells Fargo's earnings in recent weeks, even as they steadily cut them for most other big banks. The bank, a relative unknown on the East Coast until it scooped up Wachovia at the height of the financial crisis in 2008, is now the country's biggest bank my stock market value.

Mortgages are a large part of the bank's livelihood, and it has muscled its way to the top of the chain as its rivals pulled back. The trade publication Inside Mortgage Finance estimates that Wells Fargo controls 34 percent of mortgage lending in the U.S. The runner-up, JPMorgan Chase, controls 11 percent.

That strategy has driven revenue higher, but it also brought headaches. Thursday, for example, the bank agreed to settle Department of Justice charges that it had discriminated against African-American and Hispanic borrowers by steering them into expensive mortgages. The bank denied the charges but said it wanted to get the matter behind it.

Like other banks, Wells Fargo has also been buying back mortgage-backed bonds from investors who say they were misled about the mortgages when they bought them. The bank said it added $669 million for mortgage repurchases in the latest quarter, compared with $242 million a year ago, mostly because it expects more demands from government-sponsored Fannie Mae and Freddie Mac.

Total loans grew, including commercial and industrial loans increased. The bank had a record amount of mortgage applications. It also had record car loans.

Fees that the bank charged on credit and debit cards fell 30 percent, partly because of new federal laws that restrict how much banks can charge. The bank also added to reserves for potential losses in the unit that caters to businesses. Assets in the wealth management division fell, and revenue from the brokerage fell. Gains from trading and stock investments fell.

The bank is also cutting expenses. It eliminated about 2,200 jobs, or 1 percent of its work force compared to a year ago. Since the end of 2010, Wells Fargo has cut 10 percent of the work force in "high cost geographies."

Commissions and bonuses rose 8 percent and total salaries rose 3 percent, though employee benefits declined 10 percent. The bank also cut spending on equipment, postage and advertising, though travel and entertainment increased.

Wells Fargo's stock rose 49 cents to $33.34 in early trading.

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