Friday, July 11, 2014

Five takeaways from Wells Fargo's earnings

San Francisco-based Wells Fargo reported second-quarter results Friday, kicking off earnings season for major banks. Here's a look at some takeaways from the bank's conference call with analysts:

1. Earnings streak over

Wells Fargo had posted an increase in earnings per share from one quarter to the next for 17 quarters in a row. But that streak came to an end Friday, as the bank reported profit of $1.01 per share, down from $1.05 in the first quarter. The $1.01 per share met analysts’ expectations, though.

2. Housing market disappoints

Chief Financial Officer John Shrewsberry commented earlier this year that the spring housing market has not lived up to expectations. Reiterating that sentiment Friday, he described the spring housing market as "less than we originally imagined.” Wells Fargo, the largest U.S. mortgage lender, is often seen as a bellwether for the housing market. The bank's revenues have taken a hit as rising interest rates have lowered demand for homeowners to refinance their mortgages. In the second quarter, revenue in its community banking segment fell $336 million, or 3 percent, from a year ago, primarily because of lower mortgage banking revenue.

3. Risky auto lending?

Wells Fargo, the largest U.S. auto lender, a title it took from Ally Financial, has been pushing to increase its auto lending. Wells Fargo made $5.5 billion more auto loans in the second quarter from the same period a year ago. But analysts are wondering whether Wells Fargo might be becoming too risky in its lending practices as it tries to grow those loans. It's a concern regulators have also voiced about the auto lending industry in general lately. Last month, the Office of the Comptroller of the Currency noted in a report that there are "loosening underwriting standards" and "increased layering of risk" in the indirect auto lending industry.

"Are you taking too much risk in an area such as auto lending where loans are up 10 percent year over year?" one analyst on the call asked Wells Fargo executives Friday.

"I don’t think we are taking inappropriate risk," John Stumpf, the bank's CEO, replied.

4. Consumers more optimistic

Wells Fargo, because it's a mega-bank and serves many consumers, is viewed as somewhat of a barometer for the health of the broader economy. As consumers and businesses remain cautious about borrowing, Wells Fargo, like other banks, has struggled to grow revenues. The bank's revenue in the second quarter was down by $300 million from a year ago, in part as demand to refinance home loans fell. But Stumpf said Friday he's seeing positive economic signs.

"As I'm out talking with customers and talking with our team, there is ... more optimism," he said. "We are having more discussions with more customers about buying homes, buying autos, investing in infrastructure if you are a business, buying something." He said certain sectors of the economy "are doing very well."

5. More cost-cutting

Slashing costs has been a theme at banks big and small since the financial crisis, as they cope with sluggish revenue growth. To help lower overhead, banks have trimmed personnel and branches. In the second quarter, Wells Fargo cut its expenses from a year ago. Its interest expense fell by $75 million, and its noninterest expense, which includes salaries, fell by $61 million. The bank shed 10,800 employees from a year ago, bringing the figure down to 263,500 full-time equivalents.