Wells Fargo (NYSE: WFC) managed to maintain its position as the top mortgage originator for the first quarter of 2013, earning a market share of 22 percent. This puts the bank in a prime position to make millions from the housing recovery. Does this mean that investors should buy Wells Fargo stock for their portfolios?
Biggest US Mortgage Lender
There is no doubt that Wells Fargo is the biggest home lender in the US, since figures from the research group Inside Mortgage Finance indicate that for 2012, it issued nearly 30% of all home loans issued in the US, or a total of $524 billion in home loan production. This means that the bank's home loan output is greater than the combined total of the next five biggest lenders. It also set a record for the largest annual total for a single lender. The bank also dominated some of the most lucrative real estate markets in the country. In San Francisco, Wells Fargo issued some 21% of new home loans, followed closely by Manhattan, where it was responsible for close to 20% of new loans. In Los Angeles, it had 12% of new home loans and in Dallas, it had nine percent.
In 2012, the bank reported that its income from its mortgage banking operations alone reached $11.6 billion. For the first quarter of 2013, its income from mortgage banking was $2.8 billion, nine percent lower than in the same quarter last year. Originations for the quarter reached $109 billion, making it the sixth consecutive quarter that the bank had recorded originations of more than $100 billion. Meanwhile, its total delinquency and foreclosure ratio for the quarter was 6.5%, lower than the 6.9% recorded in the same period last year as well as being less than those of its competitor banks.
Meanwhile, the bank reported gains in other financial indicators. Its overall net income was $18.9 billion for full-year 2012, a 19% increase from the $15.9 billion reported in 2011, while its total revenues were $86.1 million, up 6% from the $81 million reported in the past year. This brought its diluted earnings per share to $3.36, from $2.82 in 2011. For the first quarter of the year, net earnings were $5.2 billion, an increase of 22% from the same quarter last year. Diluted EPS for the period was reported at $0.92, up 23% from $0.75 in the same quarter last year.
The increase in revenue was attributed to increasing net gains in mortgage loan origination/sales activities, which grew to $10.3 billion in 2012, nearly double the $4.6 billion recorded in 2011. For the first quarter of the year, these net gains accounted for $2.5 billion, a slight decline from the same quarter the previous year.
The bank's improved results were also helped by its purchase in 2008 of Wachovia Corp., whose assets helped nearly double the bank's size, turning it into the fourth largest in the US in terms of assets. The merger with Wachovia also gave Wells Fargo East Coast branches, a retail brokerage and an investment banking unit.
Investors showed their confidence in the bank by boosting its stock prices to record levels. WFC recorded a closing record of $41.27 on June 10, and even reached as high as $41.69 in intraday trading. The stock price has gained close to 18% since the start of the year, which trails the 20.6% year-to-date increase in the KBW Bank Index (Dow Jones Indices:BKX), which tracks 24 stocks representing national banks and leading regional financial institutions. The Bank has consistently had the highest market capitalization among US banks for most of the past year and a half, and is currently at $216 billion, substantially higher than its closest rival, JPMorgan (NYSE: JPM), which had a market cap of just $203.5 billion.
WFC stock also remains the top pick of Warren Buffet's Berkshire Hathaway (NYSE: BRK.A) mutual fund, which added an additional 18.3 million shares of Wells Fargo stock in the first quarter, which brought the value of its total holdings to $16.95 billion. Wells Fargo stock currently accounts for some 20% of Berkshire Hathaway's stock portfolio, displacing Coca-Cola (NYSE: KO), which had previously been the fund's largest holding.
The Bottom Line
After being forced to maintain artificially low dividend levels in 2009 and 2010 by the Fed, payouts have come roaring back. From a $0.12 per quarter dividend in 2011, the bank declared dividends of $0.25 per share in the first quarter of 2013.
The only possible risk with investing in Wells Fargo stock is the possibility that the current increase in home prices could actually be signaling a housing bubble, which could affect the bank's mortgage business. But even if housing prices pop, the bank's dedication to conservative banking standards would help it prevail. It should be noted that during the housing crisis, Wells Fargo was able to weather the bust due to its reduced exposure to subprime mortgages.