Swelling Mortgage Pool Splashes on Some Value for Wells Fargo
Wells Fargo’s (NYSE:WFC) origination business could take a lick from rising rates, which in normal environments, tends to dampen home mortgage demand (see Wells Fargo Mortgage Originations to Slow as Interest Rates Rise). This could weigh on the stock given the size of its mortgage unit. However overall mortgages outstanding also plays a factor, and this could provide some support for the stock. Wells Fargo competes with other banks like Bank of America (NYSE:BAC), Goldman Sachs (NYSE:GS), JP Morgan (NYSE:JPM), Citigroup (NYSE:C) and UBS (NYSE:UBS) in the mortgage business.
Wells Fargo is the fourth largest bank in the US by assets and the second largest bank by market cap. It is also the second largest bank in deposits, home mortgage servicing and debit cards in the U.S. We estimate that the mortgage division is Wells Fargo’s largest value driver constituting nearly 30% of the $33.81 Trefis price estimate for Wells Fargo’s stock, which is just around 4% ahead of the current market price.
Average Home Mortgage Loans Outstanding
Well Fargo’s average outstanding balance on home mortgage loans has increased from $134 billion in 2005 to $337 billion in 2010. In 2009 Wells Fargo acquired Wachovia and this caused the average outstanding balance on home mortgage loans to more than double. Going forward, we forecast the outstanding balance on home mortgage loans will continue to grow at an annual rate of around 10% based on the following factors:
1. Wachovia acquisition provides new opportunities
With the acquisition of Wachovia, Wells Fargo will now have access to newer households. Since the cross-sell (average number of products/services sold to each of the bank’s customer) at Wachovia has been traditionally lower than that at Wells Fargo, this will provide additional opportunities for expansion.
2. Wells Fargo’s Low Delinquency and Foreclosure rates
Wells Fargo Home Mortgage (WFHM) has traditionally maintained a higher mix of prime conventional and government loans than the overall industry, especially during the credit bubble which helps explain why Wells Fargo rebounded in a relatively better position vs. competitors than before the crisis.
Some Positive Impact to the Stock
WFHM’s foreclosure and delinquency rates have been much lower than the industry’s. As a result, Wells Fargo’s average outstanding balance on home mortgage loans grew at a faster rate than the overall industry during 2007-2009. We believe this trend will continue in the future and allows Wells Fargo loan balances to increase at a faster rate than the industry’s.
We estimate if the Wells Fargo’s average outstanding balance on home mortgage loans increased by 15% in 2011 vs. the 5% increase we expect and then increases 10% annually going forward, this adds around 1-2% stock value. So it doesn’t move the stock a ton but gives you an idea of sensitivity for this segment of the business.
To see the impact of average outstanding balance on home mortgage loans on the stock estimate drag the trend line in the modifiable chart above or to see other key units to WFC stock, scroll through the slideshow below.