Wells Fargo Posts Higher Profit but Misses Expectations as Mortgage Revenue Falls

Wells Fargo & Co. reported 12% higher earnings Tuesday, but the San Francisco banking giant, socked hard by the end of the mortgage refinancing boom, missed Wall Street’s expectations.

Wells Fargo, the largest California-based bank and the nation’s biggest home lender, said third-quarter revenue from its mortgage unit declined by 40%, to $900 million from $1.5 billion a year earlier. And home loan originations plunged 58%, to $68 billion.

Other financial institutions also posted earnings Tuesday. City National Corp. of Beverly Hills said its quarterly profit rose 2% and UnionBanCal Corp. of San Francisco reported a 5.4% gain in profit.

Banking executives noted that the third quarter of 2003 was when the mortgage refinancing boom peaked. As interest rates turned back up, lenders refocused on home purchases -- a business Wells Fargo hopes to expand by adding 10,000 mortgage salespeople in the next three years.

The record third quarter last year “kind of distorts the comparisons year over year,” Wells’ chief financial officer, Howard Atkins, said in an interview. “The interesting story is that despite that, revenue for the rest of the company grew by 11% and the bottom line was up 12%.”

Wells Fargo reported a profit of $1.75 billion, or $1.02 a share, up from $1.56 billion, or 92 cents, in the third quarter of 2003. Revenue was $7.3 billion, the same as the third quarter of 2003 and down 1% from this year’s second quarter.

Wall Street had expected earnings of $1.06 a share, along with $7.5 billion in revenue. Wells shares fell 80 cents to $59.35 on the New York Stock Exchange.

Major contributors to the bank’s growth included credit cards and home equity lines of credit, Atkins said. When Norwest Corp. of Minneapolis merged with Wells Fargo to create the current bank six years ago, only 20% of Wells’ customers had a credit card from the bank, he said. That was a figure that exceeded 30% in the third quarter.

“And when we look at all Wells Fargo retail customers who have a home, only 20% have a home equity loan or line of credit with us,” Atkins said. “So we have lots of room to grow.”

Stephen Leeb, whose Leeb Capital Management in New York owns Wells Fargo shares, said the company would have slightly exceeded Wall Street forecasts had it not taken a small loss on the sale of $4 billion in bonds and adjustable-rate mortgages.

“This bank has shown that it can grow in the face of a downturn in the mortgage business -- they’re not just a mortgage lender,” Leeb said.

Richard X. Bove, a bank analyst for Punk, Ziegel & Co., initiated coverage of Wells Fargo on Tuesday. Despite praising its management, Bove rated Wells only “market perform.”

Wells “is a real estate finance bank and there are too many uncertainties in that business to allow us to recommend the stock,” Bove said. Adding thousands of mortgage sales specialists and numerous branches is an “extreme” move, at least for the near future, he wrote.

In other earnings reports, City National, Southern California’s largest bank, posted a profit of $53.5 million, or $1.04 a share, on revenue of $185 million, compared with $52.5 million, or $1.05, on revenue of $174 million in the year-earlier quarter. The earnings, released after the markets closed Tuesday, met analysts’ expectations. City National shares fell 50 cents to $66.26 on the NYSE.

Analyst Joseph K. Morford at RBC Capital Markets said City National appeared to be on target in all areas except commercial lending, which slipped slightly. He noted that the bank had moved to strengthen that business by hiring commercial lending experts laid off by Washington Mutual Inc., which is restructuring.

UnionBanCal, the parent of Union Bank of California, earned $163.4 million, or $1.09 a share, on revenue of $629.1 million, compared with $155 million, or $1.02, on revenue of $603.2 million in last year’s third quarter. The results, announced after the markets closed, were slightly better than expected, Morford said. UnionBanCal shares closed down 86 cents at $59.10 on the NYSE.

The bank also said it was tightening its money-laundering safeguards at its international unit in New York at the behest of federal regulators.