Wells Fargo Sees Q4 Growth Despite Shrinking Interest Margin, Higher Costs
Wells Fargo (NYSE:WFC) detailed its performance figures for fourth quarter and full-year 2014 on Wednesday, January 14, and the banking giant managed to meet investor expectations despite facing notable headwinds for the period – the biggest one being that its net interest margin figure fell for the tenth consecutive quarter in Q4. [1] Investors have repeatedly expressed concerns about shrinking net interest margins over recent years – especially since Wells Fargo’s banking model is more sensitive to interest rate changes compared to its larger rivals like JPMorgan Chase (NYSE:JPM), Bank of America (NYSE:BAC) and Citigroup (NYSE:C).
Wells Fargo also reported lower mortgage origination volumes for Q4 2014 compared to Q3 2014 and Q4 2013. As the mortgage industry was believed to have grown over the last quarter, and as JPMorgan reported a notable improvement in Q4 origination volumes earlier that day, this was seen as a sign of Wells Fargo losing ground in the industry. To make matters worse, the bank’s non-interest expenses jumped almost 5% year-on-year and 3% quarter-on-quarter – outpacing revenue growth for both these periods. The resulting reduction in Wells Fargo’s operating margin for the period also did not go down well with investors, as the bank has relied considerably on managing its expenses to maintain profitability over recent quarters.
But there were several positive trends in Wells Fargo’s results. Notably, the bank saw marked improvement in its card fees and investment banking fees. Also, Wells Fargo is well poised to gain considerably once the Fed hikes benchmark interest rates which have been maintained at record low levels since the economic downturn of 2008. The positive impact of such an event over coming quarters and the improved revenue potential from the bank’s efforts to grow its card business prompted us to increase our price estimate for Wells Fargo’s stock from $55 to $57.
See our complete analysis of Wells Fargo here
Mortgage Origination Revenues Miss The Mark
Wells Fargo originated just $44 billion in mortgages in Q4 2014 – making this the second worst quarter for the bank in terms of mortgage origination volumes in at least ten years. The only time the bank fared worse was in the first quarter of 2014 ($36 billion). As a result, the $175 billion in mortgage originations for full-year 2014 is the worst tally for the bank since at least 2005. In comparison, the bank originated mortgages worth $139 billion in the third quarter of 2012 – its best quarter to date. The graph below captures Wells Fargo’s mortgage origination volume for each quarter since Q1 2011 as well as the corresponding revenues for each period.
As can be clearly seen here, the resulting impact on revenues has been drastic over the years, with mortgage origination and sales revenue sinking from well over $2.5 billion in Q1 2013 to $572 million in Q1 2014. The figure for Q4 2014 was $830 million thanks to the higher percentage of refinances in Q4 2014 (52%) compared to Q1 2014 (39%), as refinanced mortgages generate a higher one-time revenue. But Q4 2014 revenues were lower year-on-year as well as quarter-on-quarter.
Also, the bank’s mortgage servicing unit generated revenues which were largely similar to what was seen in the previous and year-ago periods. Servicing revenues for Q4 2014 were $685 million compared to $679 million in Q3 2014 and $709 million in Q4 2013. The total size of the mortgage servicing portfolio, however, has fallen from just over $1.9 trillion in Q4 2013 to $1.86 trillion now.
Focus On Growing In Other Areas Is Key To Unlocking Value
Wells Fargo has done well in recent years to combat the pressure on its primary revenue streams – interest income from loans and fees from mortgage origination and servicing – by exploring other fee-based revenue sources. In particular, the bank has grown its asset management and investment banking fees quite notably, and has also stepped up its equity investments. Wells Fargo reported investment banking fees of $521 million for the quarter – only the second time since its acquisition of Wachovia that the bank churned out more than half a billion dollars in these revenues (the other being Q2 2013).
An important addition to this list of growing revenue streams for Wells Fargo in Q4 2014 was credit card fees, as Wells Fargo began to reap the benefits of the card agreement it signed with the retailer Dillard’s over the quarter. [2] The bank saw card fees touch $925 million for the quarter – a 6% improvement sequentially and a 12% jump year-on-year.
View Interactive Institutional Research (Powered by Trefis):
Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap
More Trefis Research
- 4Q 2014 Results, Wells Fargo Press Releases, Jan 14 2015 [↩]
- Wells Fargo extends credit card push in deal with Dillard’s, Reuters, Apr 11 2014 [↩]