Last Friday, Wells Fargo (NYSE:WFC) announced its earnings figures for the third quarter of the year beating our expectations by continuing its income growth streak with another record performance this quarter.  The largest U.S. bank in terms of market capitalization has now reported growth in its bottom-line numbers for 11 consecutive quarters – a commendable feat as major banks have struggled to even maintain their revenue figures post-2008. While strong demand for mortgages over the quarter contributed significantly towards boosting revenues, a notable reduction in provisions and non-interest expenses for the quarter played an important role in these record earnings. The bank also reported a strong performance from its downplayed sales & trading unit.
We stick to our $38 price estimate for Wells Fargo’s stock, which is at a premium of over 10% to the current market price.
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Government Measures Gave A Leg-Up To Already Strong Mortgage Business
Wells Fargo’s growth story has largely been based on its more conservative, less risky banking model which focuses on core, traditional banking activities to generate money rather than overly relying on trading or investment banking revenues like many of its peers. And since the global economic recession of 2008, the model has held the bank in good stead primarily because of a strong mortgages base in its loan portfolio. The bank has capitalized on this strength over recent years to attract more mortgage customers than any of its competitors making it the country’s largest originator and servicer of mortgages.
This time around, Wells Fargo originated $139 billion in mortgages – well over the $131 billion and $129 billion in Q2 and Q1 2012 respectively. This is from mortgage applications of $188 billion it received over the quarter. Low interest rates and the government-backed Home Affordable Refinance Programs (HARP) drove home-owners to the bank in large numbers to refinance their existing mortgages.
Declining Non-Interest Expenses A Great Sign
Wells Fargo reported total non-interest expenses of just over $12.1 billion for Q3 2012, representing a decline in overall operating costs for the second consecutive quarter. In fact, the figures have not been lower in the last 4 quarters – since costs totaled $11.7 billion in Q3 2011. While a large portion of this fall in costs is due to a reduction in operating losses, the impact of Wells Fargo’s organization-wide cost-cutting strategies cannot be ignored.