Mortgage Business Weighs on Wells Fargo Earnings

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Wells Fargo & Co. (NYSE: WFC) reported third-quarter results before markets opened Friday morning. The bank posted diluted earnings per share (EPS) that totaled $0.99 on revenue of $20.5 billion. In the same period a year ago, Wells Fargo reported diluted EPS of $0.88 on revenue of $21.21 billion. Third-quarter results also compare to the Thomson Reuters consensus estimates for EPS of $0.97 and $20.97 billion in revenue.

The bank reported Tier 1 common equity of $120.3 billion and a Tier 1 common equity ratio of 10.64%. Under Basel III capital rules, the bank’s estimated Tier 1 common equity ratio is 9.54%.

Wells Fargo’s revenue decline came as a result of lower revenue in its mortgage banking division. The bank said recent interest rate increases cut refinancing volume. As a portion of all mortgage applications, refinancings have fallen from the mid-80% range to the mid-60% range, according to data published by the Mortgage Bankers Association.

Wells Fargo’s CEO said:

As our economy continues to transition to higher interest rates, our diversified business model and strong risk discipline contributed to record earnings per share along with continued strength in return on assets, return on equity and capital. The improvement in the housing market has been beneficial to our customers and significantly contributed to our broad-based credit improvement in the quarter.

Wells Fargo did not offer any guidance in its announcement, but the consensus estimates for the fourth quarter of 2013 call for EPS of $0.98 on revenues of $20.98 billion. For the full year, the EPS estimate is $3.84 on revenues of $84.85 billion.

In its mortgage banking business, Wells Fargo reported home lending originations down sequentially from $112 billion to $80 billion, and applications down from $146 billion to $87 billion. Worse, the application pipeline at the end of the third quarter totaled $35 billion, way down from $63 billion at the end of the second quarter. Investors will not be happy with any of this.

Wells Fargo shares are down about 1.6% in premarket trading Friday morning, at $40.78 in a 52-week range of $31.25 to $44.79. Thomson Reuters had a consensus analyst price target of around $46.00 before this report.