Wells Fargo (NYSE:WFC) surprised investors this Tuesday by coming up with yet another record quarterly performance despite the increasing pressure on its top-line from low interest margins as well as the falling demand for mortgages.  The country’s largest bank in terms of market capitalization has done a great job shifting its focus on other revenue streams within its traditional-banking business model – demonstrated by the fact that its non-interest income from all sources besides mortgages was the highest-ever figure of $8.3 billion for Q4 2013. This, coupled with Wells Fargo’s diligent efforts at cutting costs, is largely responsible for the continuing improvement in the bank’s bottom-line figures.
Also noteworthy was that the bank’s loan provisions began to normalize this quarter. Although the Q4 2013 provision figure of $363 million is still a fraction of the nearly $2 billion the bank was setting aside each quarter as late as Q4 2012, it is the first time the figure has increased after falling steadily for four quarters. We expect the provisions to grow more over the next few quarters.
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The well-rounded performance by the bank this quarter as well as the expected improvement in interest margins over the next few quarters once the Fed’s tapering plan comes into effect led us to revise our price estimate for Wells Fargo’s stock upwards from $46 to $50. The updated price is about 10% ahead of its current market price.
Net Interest Margins Tanked Further, But The Fall Likely To Be Arrested In Q1 2014
One concern for investors in Wells Fargo in recent quarters has been the steady decline in the bank’s net interest margin (NIM). Due to the extended low interest rate environment, safe investment options with reasonably high rates of return have been difficult to come by.
The table below summarizes Wells Fargo’s reported net NIM figures for each of the last twelve quarters:
|Q1 2011||Q2 2011||Q3 2011||Q4 2011||Q1 2012||Q2 2012||Q3 2012||Q4 2012||Q1 2013||Q2 2013||Q3 2013||Q4 2013|
As can be seen above, the NIM margin figures for Wells Fargo have been in a free fall since early 2011, with the key metric shedding almost 80 basis points (0.8%) within three years. The impact of this has been rather marked on the bank’s top-line because of its heavy reliance on the traditional loans-and-deposits model to make money. You can get an idea of how sensitive Wells Fargo’s share value is to changes in NIM by dragging the trend-line in the chart below, which represents interest margins for the bank’s investment securities.
But with the Fed finally initiating its taper plans, the gradual reduction in liquidity should ease this pressure on interest margins. Consequently, we expect Wells Fargo to report a long-awaited increase in NIM figures for the current quarter.
Fee Incomes Grow Even Though Mortgages Dry Up
Wells Fargo originated just $50 billion in mortgages this quarter – the lowest at least since it acquired Wachovia in late 2008. This is 38% below the $80 billion in mortgages the bank handed out in Q3, and 60% lower than the $125 billion figure for Q4 2012. The resulting impact on revenues has been just as drastic, with mortgage origination & sales revenue sinking from $2.8 billion in Q4 2012 to $861 million in Q4 – a 70% decline.
However, the impact of this on the bottom line was mitigated by a steady improvement in trust & investment fees as well as card fees for the bank. Trust & investment fees of $3.46 billion for Q4 were just shy of the all-time high figure of $3.49 billion seen in Q2. The overall strong performance of the brokerage business saw these fees soar 13% from $11.9 billion in 2012 to $13.4 billion in 2013.Notes:
- Wells Fargo Reports Record Full Year and Quarterly Net Income, Wells Fargo Press Releases, Jan 14 2013 [↩]