Wells Fargo (NYSE:WFC) will release its performance figures for the second quarter of the year before the trading bell goes off this Friday, and the bank is expected to come out with yet another record quarter driven by its swelling mortgage business. As the largest bank in terms of market capitalization, Wells Fargo has stunned investors with consistent growth in revenue and income figures quarter after quarter, despite weak economic conditions which have made competitors including Bank of America (NYSE:BAC) and Citigroup (NYSE:C) work hard to just maintain their numbers.
We maintain a $35 price estimate for Wells Fargo’s stock, which is close to its current market price.
The Mortgage Unit Is Only Getting Bigger
Wells Fargo accounted for a record 33.9% of all mortgages originated in the country for the first quarter of 2011 (see Wells Fargo Remains King Of The Mortgage Market, $35 Fair Value). And the reduced focus on the mortgage business by some of its biggest competitors only means that the bank most likely extended its share to over 35% this quarter. This would suggest nearly $135 billion in mortgages originated over the period – up from $129 billion in Q1 2012 and $120 billion in Q4 2011.
While this 5% q-o-q growth in originated mortgages that we forecast for the bank will push revenues up in an environment where interest rates largely remained unchanged, there are additional gains expected from further reductions in the bank’s charge-off rates for loans outstanding. Home prices have seen an increase over this quarter after seeing a decline for two quarters, and this should essentially reduce the amount Wells Fargo sets aside this quarter as provisions.
Project Compass Should Also Yield Results Now
Late last year, Wells Fargo announced plans to cut costs by nearly $1.5 billion each quarter to about $11 billion by the end of 2012. The plan, dubbed Project Compass, involved job cuts across operating divisions besides streamlining the bank’s enormous operations across the country. Things did not exactly work out as planned when the bank’s non-interest expenses rose to $13 billion for Q1 2012 from $12.5 billion in the quarter before. These expenses should be in the $12.3 billion – $12.5 billion range for this quarter, as detailed by the bank in its Q1 press release. ((Wells Fargo Reports Record Quarterly Net Income, Wells Fargo Press Releases, Apr 13 2012))