Wells Fargo, the nation’s largest home lender, reported a 13 percent jump in third-quarter profit on Friday even as a slowdown in the mortgage market muted the bank’s growth.
Bolstered in part by the improved quality of its loans and a $900 million release in its reserves, the bank’s net income rose to $5.6 billion, or 99 cents a share. That outdid the $4.9 billion, or 88 cents a share, Wells Fargo earned in the third quarter of 2012, making it the 15th consecutive rise in quarterly profits for the bank. The report also exceeded the expectations of analysts polled by Thomson Reuters, which predicted earnings of 97 cents a share.
For the 10th straight quarter, Wells Fargo reported a new record in profits.
“Wells Fargo continued to demonstrate strong and consistent financial performance in the third quarter,†the bank’s chief executive, John G. Stumpf, said in a statement.
Revenue, however, slumped to $20.5 billion, from $21.4 billion a year ago. The revenue results were slightly lower than analysts’ estimates.
And beneath the steady churn of profits, the bank’s mortgage machine has started to stall, a consequence of the rise in interest rates that is discouraging borrowers from refinancing their mortgages. The bank received $87 billion worth of home loan application in the quarter, a steep fall from $188 billion in the period a year earlier. Its mortgage originations totaled $80 billion, down from $139 billion. And a decline in mortgage banking revenue, the bank said, stemmed from a decline in refinancing.
The slowdown largely stems from a subtle shift at the Federal Reserve. Until now, banks have benefited from Fed policies intended to stimulate the economy in the wake of the financial crisis. As the Fed slashed interest rates, it spurred millions of borrowers to refinance their home loans to take advantage of the lower rates.
But this spring, the Fed signaled that it could ease its stimulus as the economy continues to recover. The warning prompted investors to drive up interest rates around the globe, thus stifling enthusiasm for refinancing. Although rates started to fall again in the final days of the third quarter - and the Fed recently said “it would be prudent to await further evidence of progress before†curtailing the stimulus - the average rate for a 30-year fixed mortgage stands at 4.22 percent, up from a low of 3.34 percent in early 2013.
The rising rates will probably take a disproportionate toll on Wells Fargo. The bank’s fortunes rise and fall with its lending business, by virtue of creating roughly a third of all mortgages in the country.
Wells Fargo and JPMorgan Chase kicked off bank earnings season. The banks’ results could signal a slowdown for the broader lending industry. Citigroup, Bank of America and other Wall Street giants report earnings next week, and the mortgage market is expected to weigh down results for all the banks.
