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Well's Fargo (WFC), America's largest home lender, posted strong second quarter results for 2012. The strength lied in an improvement in its mortgage banking, and a drop in expenses. However, the results were moderately below consensus estimates.

WFC 2Q2012 Results

Actual

Expected

% Surprise

Revenues ($Bn)

21.3

21.8

-2.3%

EPS

0.82

0.84

-2.4%

The table below shows that the bank earned $21.3b in revenue, against expectation of $21.8b. Revenue remained 2% below expectations. Similarly, earnings per share of $0.82 remained 2% below expectations.

WFC 2Q2012 Results

2Q2012

1Q2011

% change

2Q2011

% change

Revenues

21.3

21.6

-1.4%

20.39

4.5%

Net Income

4.6

4.25

8.2%

3.95

16.5%

EPS

0.82

0.75

9.3%

0.7

17.1%

Community Banking

Profit

2.54

2.35

8.1%

2.12

19.8%

Wholesale banking

Profit

1.88

1.87

0.5%

1.9

-1.1%

Wealth, Brokerage and Retirement

Profit

0.343

0.296

15.9%

0.337

1.8%

Net Income Margin (%)

3.91

3.91

0.0%

4.01

-2.5%

Loan Growth

775.2

766.5

1.1%

Core Deposits

880

870.5

1.1%

The bank earned revenue of $21.3b during the second quarter of the current year. This was only moderately below what it earned during 1Q2012, and 5% above 2Q2011. The bank's net income advanced from $4.25b in 1Q2012 to $4.6b in 2Q2012, while its EPS of $0.82 was up by 9% and 17% from 1Q2012 and 2Q2011, respectively. The improvement in results was largely due to a growth in the bank's community banking segment.

Community banking profit surged by 8% over the previous quarter to reach $2.54b. This was largely due to a growth in deposit service charges, trust & investment fees and debit, credit & merchant card transaction volumes, and a decrease in non-interest expense. Home mortgage originations were up to $131b from $129b in the previous quarter. Applications were up to $208b from $188b over the same period.

The wholesale banking segment profits largely remained flat. The segment earned $1.88b in profits during the second quarter of the current year. Strong growth across capital finance, commercial banking, commercial real estate, corporate banking, capital markets, international and real estate capital markets led to sustainability of profits.

Wealth, Brokerage and Retirement segment, WFC's smallest segment saw a significant surge in its profits. Profits increased by 16% to reach $343mn, compared with $296mn in the previous quarter. The improvement was driven by strong retail brokerage deposit growth of 14%, and a moderate growth in institutional retirement plan assets.

The bank was able to reduce its non-interest expenses by $596mn in the quarter. The decline occurred largely due to a reduction in the seasonally elevated employee benefits expense.

In conclusion, as we predicted, Well's Fargo posted strong second-quarter results based on robust growth in its mortgage banking and cost cutting program (Project Compass). The bank has huge exposure to the U.S. housing markets, which is showing signs of improvements. These improvements in the housing markets will continue to enhance earnings and thus the stock price. We have a buy rating for the bank.

While comparing JPMorgan Chase (JPM), we think investors should stay away from the stock until management gives a clear picture on the bank's risk management practices. Citigroup (C) and Bank of America (BAC), the other two large cap competitors of Well's Fargo will be reporting their second-quarter results on July 16 and July 18.

Source: Wells Fargo Earnings Makes Us More Bullish On The Stock