Wells Fargo (NYSE:WFC) released solid results last week and showed why it’s the leader of the country’s mortgage market. The quarter also saw Wells Fargo finalize the acquisition of BNP Paribas’s North American energy lending unit and a subscription finance loan portfolio from WestLB. 
We have revised out price estimate for Wells Fargo’s stock upward from $35 to just under $38 largely due to an increase in our growth estimates for the bank’s mortgage business and from the bank’s demonstration this quarter that its cost saving plan is on the right track. The new price is at a premium of about 10% to the current market price.
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The Results Still Revolve around the Mortgage Business
Wells Fargo originated $131 billion in mortgage this quarter, more than the $129 billion in Q1 2012 and $120 billion in Q4 2011. The bank already boasts of originating one in every three mortgages in the country, and things are only poised to improve in coming quarters.
At the same time, the fee income generated by the bank by servicing mortgages for others is also on the rise along with the actual size of the servicing portfolio. This is evident from the fact that the total mortgage banking fee income for Wells Fargo has almost doubled from $1.6 billion in Q2 2011 to $2.9 billion in Q2 2012.
And the Bank Has Been Successful in Reining in Costs to a Good Extent
Wells Fargo’s Project Compass, which started late last year, is now showing its impact on the bottom-line. The bank cut down non-interest expenses for the quarter to $12.4 billion – well below the Q1 2012 figure of $13 billion, and also lower than $12.5 billion for the same period last year. The reduction helps build confidence on the bank’s plans to reduce quarterly costs to $11 billion by the end of the year – a significant addition to its total value.Notes: