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Wells' 3% Profit Rise Tops Views

The post-financial crisis wish to "make banking boring again" — even with squeezed interest margins, low interest rates and increased scrutiny from regulators — may be seeing some fulfillment.

As the second-quarter earnings season kicked off, Wells Fargo (WFC) was the first big bank to disclose results. It snapped a 14-quarter streak of double-digit-percentage profit growth. Earnings grew only 3.1% from a year ago to $1.01 per share, matching estimates of analysts polled by Thomson Reuters.

Q2 also marked Wells Fargo's sixth straight quarter of revenue declines, with a 1.5% fall to $21.1 billion.

Boring? Maybe.

But while Wells Fargo stock closed down 0.6% at 51.47 in the stock market Friday, it's up 13% so far this year. The S&P 500 benchmark is up just 6%.

Not so boring.

This week will be dominated by the nation's other big banks reporting second-quarter earnings, with Citigroup (C)reporting Monday, JPMorgan Chase (JPM) and Goldman Sachs (GS) Tuesday, Bank of America (BAC) Wednesday and Morgan Stanley (MS) rounding out the reports Thursday.

Total Bank Profit Slipping

A blockbuster quarter isn't anticipated: The financial sector is expected to show a 2.7% decline in earnings in the April-to-June quarter.

Q2 will "represent a continuation of the challenges facing the larger banks," with moderate acceleration of loan growth and improving credit indicators, said Credit Suisse analyst Moshe Orenbuch. But continuing pressure on net interest margins, lackluster fee income and less volatility will mean lower trading profits, he said.

As for Wells Fargo, total loans grew by $2.5 billion, compared with Q1, to $828.9 billion in the last three months. That included growing business in auto loans, credit cards, business lending as well as residential and commercial real estate.

Wells' growth in auto loans is eye-catching, up 9% from Q2 2013 to $7.8 billion in originations. Q2 home-loan originations reached $47 billion, up 30.5% from $36 billion in originations a year earlier. Senior home mortgages totaled $260 billion, up 2.9% from a year ago.

Capital And Assets Grow

Capital levels strengthened, with Tier 1 capital standing at 12.73% on June 30, compared with 12.63% on March 31, and 12.12% at the end of Q2 2013.

Total assets grew 11.2% from a year earlier to $1.6 trillion.

Many major banks also are facing multibillion-dollar fines from the U.S. government stemming from their mortgage-backed securities practices in the years leading up to the financial crisis.

Citigroup reportedly is nearing a $7 billion settlement with the Department of Justice, while Bank of America is negotiating a deal rumored to exceed $10 billion. JPMorgan Chase paid $13 billion to settle allegations of skullduggery in its mortgage unit.

In 2012, Wells Fargo paid $184 million to resolve claims it steered African-Americans and Latinos into subprime mortgages or charged them higher fees than white borrowers.

The Dodd-Frank Act's higher capital requirements also provide a barrier to growth and add costs to regulatory compliance. The law, the biggest financial sector overhaul in years, ostensibly was designed to crack down on practices contributing to the financial crisis and recession of 2007-'09, but bankers complain that it ignored root causes while creating new problems.

Like other big banks, Wells has been keeping expenses down in part by laying off thousands of workers in its mortgage unit.

The San Francisco-based lender's Q2 performance "was probably a bit ahead of our expectations," said Shannon Stemm, financial services analyst for Edward Jones. "Wells has been posting pretty good growth in auto loans. They're becoming one of the top auto lenders.

Despite the positive news on loan originations, tight margins will continue to challenge Wells like other big banks, especially with interest rates remaining at historic lows.

"We really don't expect much of a pickup until we start seeing some movement in interest rates," Stemm said. "(Wells is) growing deposit balances so quickly, but that's been depressing their interest margin.

Wells' deposits totaled $1.118 trillion at June 30, up 3.7% from a year earlier.