Wells Fargo, which has come to dominate mortgage lending since the financial crisis, said on Tuesday that its fourth-quarter earnings rose 10 percent from the same period in 2012.
The bank’s results, however, contained signs that the recent fall in mortgage refinancing could hurt Wells Fargo’s profitability in the coming months.
Wells Fargo’s earnings rose to $5.6 billion, or $1 a share, from $5.1 billion, or 91 cents a share, in the fourth quarter of 2012, slightly exceeding the 98 cents a share that Wall Street analysts estimated the bank would make in the period.
For all of 2013, Wells Fargo earned $21.9 billion, a record sum that was 16 percent above its 2012 yearly profit.
Wells Fargo annual earnings exceeded the $17.9 billion annual profit JPMorgan Chase posted on Tuesday. With $1.5 trillion in assets, Wells Fargo is significantly smaller than JPMorgan, the nation’s largest bank with $2.4 trillion in assets.
“Wells Fargo had another outstanding year in 2013,†John G. Stumpf, the bank’s chief executive, said in a statement. “Strong earnings power and capital levels, and an improving economic outlook are major reasons why we look ahead to 2014 with optimism.â€
Wells Fargo has thrived since the financial crisis by focusing on traditional types of banking, and, unlike its larger rivals, it has little exposure to Wall Street activities. The bank occupies a powerful position at the heart of the nation’s mortgage market. In the first nine months of 2013, it made nearly 20 percent of all mortgages, double its nearest competitor, JPMorgan, according to data from Inside Mortgage Finance, a trade publication.
Its dominance in mortgage underwriting allowed Wells Fargo to reap huge profits as interest rates fell to record lows after the crisis, but as rates have started to creep up, Wells Fargo’s revenue from home loans has weakened. In the fourth quarter, for instance, it made $1.6 billion from mortgage banking, about half the $3.1 billion it reported in the same period in 2012.
The slowdown in demand is reflected in Wells Fargo’s quarterly revenue, which fell to $20.7 billion from $21.9 billion in the period a year earlier.
The bank reported applications for mortgages worth $65 billion, 42 percent of which were refinancings. That was down significantly from the $152 billion of mortgage applications in the fourth quarter of 2012, 72 percent of which were for refinancing.
To shore up profit as mortgage revenue has fallen, Wells Fargo has moved to cut costs, in part through laying off employees who process mortgages.
Across the bank, quarterly expenses were 58.5 percent of noninterest revenue, a slight drop from 58.8 percent in the fourth quarter of 2012.
Wells Fargo’s earnings have also benefited as its bad loan expenses have dropped sharply. The amount the bank set aside in 2013 for loan loss reserves was $2.3 billion, well below the $7.2 billion in 2012.
Large banks like Wells Fargo typically do not hold onto the mortgages they make. Instead, they package them into bonds and sell them to investors, with a government guarantee of repayment attached to each loan. As a result, the taxpayer is largely on the hook if the home loans go bad, not the bank.
Wells Fargo has held onto some of its mortgages, however, and even reported an increase in the amount of home loans it had retained. At the end of 2013, the bank was holding $257 billion of residential mortgages, up from $245 billion at the end of 2012.
