Wells Fargo & Company (WFC), the largest U.S. lender by market value, reported second-quarter profit increased 17 percent on strength in mortgage banking and a drop in expenses. Net income advanced to a record $4.62 billion, or 82 cents a share, from $3.95 billion, or 70 cents, a year earlier. Revenue increased 4 percent to $21.3 billion from a year earlier, while slipping 1.6 percent from the first quarter. The net interest margin held steady in the period from the first three months of this year at 3.91 percent.
Wells Fargo updated its target for planned expense cuts, saying it won't be able to get quarterly costs below $11.25 billion due to increased revenue opportunities. Income before taxes and provisions climbed, and the stock posted their best gain in four months.
The stock gained 23 percent this year, compared with 17 percent for the 24-company KBW Bank Index. The stock price of the company is expected to outperform the index by a larger margin in the rest of the year.
Mortgage Banking and Commercial Loans Showing Strength
Nationwide home loan originations in the U.S. probably climbed 28 percent in the second quarter from a year earlier to $372 billion, according to estimates from the Washington-based Mortgage Bankers Association. About three-fourths of those were refinancing, the MBA estimates.
Mortgage banking income climbed to $2.89 billion, a 79 percent increase from last year's second quarter and up $23 million from the first quarter, according to the company. Commercial and Industrial loans at the 25 biggest lenders climbed 3.7 percent over the first quarter to $772.2 billion in the week ended June 27, according to the Fed.
Strategic Acquisitions: Wells Fargo's Business Philosophy to Improve Profitability
Wells Fargo's growth plans have historically included a large number of acquisitions, Wachovia being the largest addition in December 2008. Recently, in an effort to boost its subscription finance business, Wells Fargo has agreed to buy WestLB's $6 billion subscription finance portfolio.
Wells Fargo is capitalizing on the deleveraging activities of the European banks. Earlier in February, Wells Fargo agreed to acquire the North American energy lending business of BNP Paribas SA (BNPQF.PK) with nearly $9.5 billion of loan commitments and approximately $3.9 billion in loans outstanding. The acquisition was closed in April 2012. Moreover, in 2011, Wells Fargo also made loan portfolio purchases from Bank of Ireland and Allied Irish Banks (AIB).
In the short term the share price of Wells Fargo is expected to move higher. I'm expecting the ongoing uptrend that started in June to continue for some more time and the stock could touch $37 in the near term.
The Relative Strength Index is consolidating near the 60 mark for over a month and is now expected to cross the significant 70 mark. The MACD is also showing a bullish cross (indicated by a red circle) where the violet line is about to cross the red line. Both indicators are signaling a near term up-move in the stock price.
Long Term Prospect
The top-line headwinds would persist, given the protracted economic recovery. Moreover, a low interest rate environment would keep its margin under pressure. Wells Fargo's unrelenting legacy mortgage issues also remain a concern.
"Wells did the best job of the big players in the mortgage market and therefore they've garnered a share as the other fellows have fallen by the wayside," billionaire investor Warren Buffett said on Bloomberg Television. Berkshire Hathaway Inc. (BRK.B) is the bank's biggest stakeholder with more than 7 percent of the common stock, according to data compiled by Bloomberg.
Long-term investors with a little risk appetite related to economy and regulations, can expect a decent growth in Wells Fargo's earnings in future. Solid capital levels, expense management as well as improved credit quality will also support its profit figures.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.