Wells Fargo Profit Jumps, but Mortgage loan Enterprise Slows

Wells Fargo WFC -0.85% & Co. posted a larger-than-expected 24% rise in fourth-quarter net income despite signs that a mortgage-refinancing boom that has boosted profits at a number of large banks may be fading.

But investors focused on a second consecutive quarterly decline in a figure analysts use to gauge future gains in the lucrative home-loan company.

In addition, a surge of deposits and near record-low interest rates continued to squeeze profit margins at the fourth-largest U.S. bank by assets.

The drop in the San Francisco company's mortgage loan pipeline is "likely to be a source of concern," said Citigroup C -1.14% analyst Keith Horowitz.

Overall, fourth-quarter net income was $5.09 billion, or 91 cents a share, compared with the year-ago $4.11 billion, or 73 cents a share. Revenue rose 6.3% from a year earlier to $21.95 billion. The figures beat Wall Street analysts' consensus estimates.

Shares of Wells Fargo, up 22% over the past year, dropped 30 cents, or 0.8%, to $35.10 amid a broad pullback in financial shares.

A $30 billion rise in deposits during the quarter, to $945.75 billion, underscores an industrywide struggle to make new loans; credit-worthy borrowers are scarce amid soft employment growth and stagnant incomes.

Chief Executive John Stumpf said on a call with analysts that the company feels "no urgency" to put the excess funds to work. "Virtually all these deposits are part of relationships," he said. "This is going to benefit this company for years and years and years to come."

Wells Fargo currently lends out about 80% of its deposits, while banks typically like their loan-to-deposit ratio to be near 100%. Chief Financial Officer Timothy J. Sloan acknowledged the slow pace of economic growth has affected the bank's ability to lend. "It's not where we'd like it to be," he said.

As a result of the deposit inflow, net interest margin?aan important gauge of lending profitability?awas 3.56%, down from 3.66% in the third quarter and illustrating the impact of low interest rates on profits. "I think you have to recognize that this interest-rate environment is very difficult," said Fred Cannon, an analyst with Keefe, Bruyette & Woods.

The results also point to early signs that an end may be coming for the U.S. home-refinancing boom, which has been spurred by low interest rates and has resulted in a lucrative stretch for large home loan banks including Wells Fargo and J.P. Morgan Chase JPM -0.02% & Co.

Mortgage-banking income for the fourth quarter totaled $3.07 billion, up 30% from a year earlier. But home loan originations fell 10% from third-quarter levels to $125 billion, and the company's unclosed-mortgage pipeline dropped for the second quarter in a row, tumbling 16% to $81 billion at year-end from $97 billion at Sept. 30.

The drop in the mortgage loan pipeline is especially important to Wells Fargo, which has become the nation's biggest home loan lender as rivals such as Bank of America Corp. BAC -1.27% have pulled back from the enterprise amid hefty losses. Early signs show that Wells's U.S. mortgage-market share slipped slightly, according to Mr. Sloan, but full numbers won't be known until other banks report earnings.

Mr. Cannon said it is unclear if the pipeline at Wells has slowed because the bank is tightening its standards or if its market share has slipped.

But Paul Miller, an analyst with FBR Capital Markets, cautioned against reading too much into the numbers.

The second and third quarters tend to be stronger ones for home loan production.

"A lot of people are looking at the pipeline decline and saying it's the beginning of the end," he said. "I think it's more seasonality than anything else."

Mr. Sloan said he didn't know if the refinancing boom was coming to an end, but said "it's prudent to plan for an environment where volumes come down and margins come down."

Total loans at the bank rose 4% from a year earlier to $799.6 billion. Wells kept on its book some $10 billion of mortgages, forgoing fees that lenders can reap when selling loans to the government-backed home loan investors Fannie Mae FNMA 0.00% and Freddie Mac FMCC -1.69% but adding to the company's income stream.

Wells recorded a $644 million fourth-quarter pretax charge for its portion of a foreclosure settlement announced earlier this week.

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Price range Inquiries For Treasury Select

President Barack Obama's nomination of near adviser Jacob Lew since the up coming Treasury secretary elicited tiny opposition from Republicans Thursday, but quite a few signaled they would utilize the confirmation method to grill him concerning the administration's potential tax and investing ideas.

A single of Mr. Lew's major duties is very likely to get assisting form a deficit-reduction package deal with Congress within the coming months, followed by a tax-code overhaul later on this year. The White Household needs any deficit-reduction package deal to contain each investing cuts and tax increases. Republicans oppose any tax increases-following the New Year's Day deal to increase prices on upper-income Americans-and say any program should really consist totally of investing cuts.

Congress is by now girding to get a clash above no matter whether to increase the government's borrowing restrict in February. Quite a few federal companies also are drawing up contingency ideas if Congress does not avert investing cuts scheduled to start March one.

U.S. Defense Secretary Leon Panetta directed the military Thursday to start taking what he known as "prudent" cost-saving measures to mitigate the influence of investing cuts. They incorporate freezing civilian employing, delaying particular contract awards and curtailing nonessential facility servicing. He stated the ways really should be reversible, in situation Congress reaches an agreement to avert the broader cuts.

Mr. Obama on Thursday pointed to Mr. Lew's encounter heading the Workplace of Management and Price range within the Clinton and Obama administrations, too as his recent work as White Household chief of workers, as positioning him properly for your Treasury publish. "He's constructed a track record as being a master of policy who can perform with members of the two parties and forge principled compromises," the president mentioned.

Mr. Lew is anticipated to get adequate assistance amongst senators to win confirmation, but several have explained they strategy to vote against the nominee. Sen. Jeff Sessions (R., Ala.) mentioned he would oppose Mr. Lew, in aspect as a result of the deficits incurred when he led the OMB through the Obama administration. Sen. Bernie Sanders (I., Vt.) also explained he would vote no.

Sen. Orrin Hatch (R., Utah) explained he would press for price range solutions. "It's essential that Mr. Lew outline the administration's ideas on tackling our unsustainable financial debt, what places of federal investing should really be lower, and what type of reforms-from our tax code to our entitlement programs-are wanted," he mentioned.

Finance Committee Chairman Max Baucus (D., Mont.) promised a "speedy but thorough" approach, and Vast majority Leader Harry Reid (D., Nev.) predicted a "fair and prompt" deliberation. Their assistance is essential and would make it really hard for Republicans to block the nomination.

Former Senate Spending budget Committee Chairman Pete Domenici (R., N.M.) praised Mr. Lew, saying "The president couldn't have selected an individual who would match extra from the characteristics important for this work than Lew."

Treasury Division Secretary Timothy Geithner ideas to leave January 25, and it can be unlikely that Mr. Lew could possibly be confirmed by then. Deputy Secretary Neal Wolin would probably serve as acting secretary if there may be a gap amongst Mr. Geithner's exit and Mr. Lew's confirmation, a Treasury official stated.

The confirmation method for Treasury chiefs ordinarily requires 6 weeks for the reason that nominees ought to fill out lengthy reports and submit scores of tax along with other private information. Nevertheless it can stretch longer if lawmakers increase queries about individual finances, between other points. The timing is significant as the Treasury Division presently is applying emergency measures to prevent default when Congress debates irrespective of whether to increase the financial debt ceiling. The Bipartisan Policy Center has predicted the Treasury will exhaust its emergency measures among Feb. 15 and March one.

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