Wells Fargo Beats Estimates on Higher Loans, Interest Income

Back Bloomberg Oct 16, 2015 By Dakin Campbell

Wells Fargo & Co., the world’s largest bank by market value, posted a third-quarter profit that beat analysts’ estimates on gains in interest income from asset purchases and new loans.

Net income climbed 1.2 percent to $5.8 billion, or $1.05 a share, from $5.73 billion, or $1.02, a year earlier, the San Francisco-based bank said Wednesday in a statement. The average estimate of 27 analysts surveyed by Bloomberg was for earnings of $1.04 a share. Revenue also beat estimates, rising 3.1 percent to $21.9 billion.

Chief Executive Officer John Stumpf has used deposit growth – more than $250 billion in the three years through June — to support asset purchases from firms including General Electric Co. Last quarter, the bank also used derivatives to lock in higher income by converting floating rates into fixed payments to take advantage of the Federal Reserve’s delay in raising interest rates.

“They have been very proactive about going out into the market” and buying loans, Shannon Stemm, an analyst at Edward Jones & Co. in St. Louis, said in a phone interview before results were reported. “They have the flexibility and the capital strength to be able to do it.”

The bank agreed this week to purchase $32 billion in assets and take on about 3,000 employees from GE. Wells Fargo said last month that it plans to buy most of the industrial firm’s railcar- and locomotive-leasing unit, and announced an agreement in April to acquire $9 billion of GE loans and finance purchases made by other companies. The April deal was completed in the third quarter.

The purchases have helped boost Wells Fargo’s ability to generate revenue from lending and other interest payments, known as net interest income, and should make the lender’s growth rate for that line item the “highest of peers,” Deutsche Bank AG analysts wrote in a Sept. 24 report.

Wells Fargo shares fell 1.3 percent to $51.20 at 8:41 a.m. in early trading in New York. The stock slid 5.4 percent this year through Tuesday’s close, trailing the 5.1 percent decline of the 24-company KBW Bank Index.

Net interest income rose 4.7 percent to $11.5 billion from a year earlier, missing Deutsche Bank’s estimate of 6 percent. Fee income rose 1.4 percent to $10.4 billion.

The bank set aside $703 million to cover bad loans in the quarter, 91 percent more than a year earlier. The increase was spurred in part by deterioration in the energy industry, the bank said.

Asset purchases have helped augment growth in areas such as credit cards, auto loans and business financing, and counter a slump in mortgage lending.

U.S. lenders originated $363 billion of home loans in the third quarter, a 21 percent increase from a year earlier, according to forecasts from the Mortgage Bankers Association. That’s down from $395 billion in the second quarter.

Wells Fargo, the largest U.S. mortgage lender, originated $55 billion of home loans in the third quarter, and ended September with $34 billion in pending applications. The bank accounted for about 14 percent of all originations in the second quarter, according to Inside Mortgage Finance data.

The six biggest U.S. banks may see total revenue decline in the third quarter for the first time this year, according to analysts’ estimates compiled by Bloomberg. Low interest rates and a global asset rout that pinched bond trading is expected to squeeze third-quarter revenue by 2.4 percent from a year earlier to $101.1 billion, the estimates show.

JPMorgan Chase & Co., the largest U.S. bank, posted third- quarter earnings Tuesday that missed analysts’ estimates as a slump in trading and mortgage banking drove revenue lower. Bank of America Corp., the second-biggest U.S. lender, said Wednesday it swung to a profit of $4.51 billion in the quarter on lower expenses.