By Peter Rudegeair and Anil D'Silva
The fourth-largest U.S. bank by assets said core lending grew by 6 percent, boosted by a sharp jump in trade finance, commercial real estate and other loans to foreign companies and a 10 percent rise in auto loans - a feat that Chief Financial Officer Tim Sloan called "absolutely terrific." The bank also dipped into money it had set aside to cover bad loans, as credit quality improved with a recovering economy.
"We sit here this January as an economy, and frankly as a company, in better shape than I have sat here in the last five or six Januaries," Chief Executive John Stumpf said on a conference call after Wells Fargo reported its results. He said he is optimistic that loans and revenues could increase over time.
Stumpf's somewhat upbeat outlook shows how the industry is still waiting for the economic recovery to translate into more broad-based loan growth and profits.
The mortgage business, which had been one bright spot for banks such as Wells, suffered a steep decline industry-wide as fewer consumers refinanced home loans because of higher mortgage rates. At Wells Fargo, the mortgage decline overshadowed improvements in many of its 89 other businesses. The bank's revenue fell 6 percent to $20.7 billion.
Wells made nearly one in five U.S. home loans in the first nine months of 2013, according to industry publication Inside Mortgage Finance. In 2013, the business accounted for 10 percent of the bank's overall revenues.
"They have various other business lines to offset" the decline in mortgages, said Christopher Mutascio, a banking analyst at Keefe, Bruyette & Woods. "But that's just it - they can only offset it; they can't grow revenue."
Wells Fargo made $50 billion of residential mortgage loans in the quarter, less than half the $125 billion in the same period a year earlier and down from $80 billion in the third quarter. Income from mortgage lending fell to $1.6 billion from $3.1 billion in the fourth quarter of 2012.
The last time the bank made that few home loans was in the fourth quarter of 2008 at the depths of the financial crisis.
Sloan said on a conference call with analysts that the bank expects mortgage volume to continue to fall in the first quarter of 2014, though not as much as in the third and final quarters of 2013.
JPMorgan Chase & Co (NYSE:JPM - News), which also reported quarterly profits on Tuesday, also said its mortgage business slowed, although the largest U.S. bank by assets also had to contend with other headaches, notably its legal issues.
Wells Fargo's shares edged up 0.07 percent to close at $45.59 on the New York Stock Exchange.
Fourth-quarter net income applicable to common shareholders increased to $5.37 billion, or $1 per share, from $4.86 billion, or 91 cents per share, a year earlier, the San Francisco-based bank said on Tuesday.
Analysts, on average, had expected earnings of 98 cents per share, according to Thomson Reuters I/B/E/S.
Expenses in the bank's home loan unit fell after it cut 6,200 positions in the second half of 2013. Those severance costs mostly impacted the bank's third quarter results.
The lower personnel expenses pushed its efficiency ratio, or expenses relative to revenue, to 58.5 percent and into its targeted range of 55 to 59 percent.
Net income also got a boost as the bank released $600 million from its loss reserves, or money previously set aside to cover bad loans. That was more than double the $250 million released in the year-earlier quarter but less than the $900 million released in the third quarter.
Seeing a bank increase profits with lower revenues is more encouraging than seeing lower profits with higher revenues, "so you'd have to be a hater to find fault in their results," said Chris Richey, a portfolio manager and managing director at Neosho Capital, a $165 million investment firm that holds Wells Fargo shares.
WACHOVIA DEAL DIVIDENDS
Wells Fargo is one of the few large U.S. banks to emerge much stronger from the financial crisis, thanks in part to its acquisition of Wachovia, which closed just over five years ago.
Many of the old Wachovia businesses performed well in the quarter. The bank's wealth, brokerage and retirement group earned $491 million, up nearly 40 percent from the same period a year earlier.
Profit from advising wealthy clients on investments and financial planning rose 40 percent from a year earlier to $140 million on just 11 percent growth in client assets and deposits. This compared with a 4 percent rise in wholesale banking profit and a 12 percent jump in community banking profit.
Average loans generated by the wealth sector grew to $48.4 billion in the fourth quarter from $43.3 billion a year earlier. The average client in the wealth sector ended the year owning 10.42 Wells products, such as a checking account or an IRA, up from 10.27 a year ago. The cross-sell in the wholesale bank was 7.1 products per relationship.
Wells Fargo increased its market share of the U.S. investment banking business to 5.6 percent in 2013, up from 5 percent in 2012 as revenue from existing wholesale banking customers grew 16 percent. The bank had acquired its investment banking business from Wachovia.
The growth in that business declined in the fourth quarter as sales and trading slowed, Sloan said in an interview.
Wells Fargo's stock jumped 28.7 percent in 2013, but lagged the 34.3 percent increase in the KBW index of bank stocks (.BKX). The company had a market value of $243.2 billion at the end of the year, making it the largest U.S. bank by that measure.
(Reporting by Anil D'Silva in Bangalore and Peter Rudegeair in New York; Additional reporting by Lauren LaCapra and Jed Horowitz; Editing by Ted Kerr, Bernadette Baum and Richard Chang)