Wells Fargo profits a boost for banks
The bank is one of the better-managed, but a rise in mortgage refinancing may be helping the industry as a whole.
A surge in mortgage refinancing activity is generating fees for US banks just when they need it most.Skip to next paragraph
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That message emerged Thursday as Wells Fargo announced a better-than-expected performance for the year’s first quarter, fueling a broader rally in the stock market.
Wells said it expects to report about $3 billion in profit for the quarter that ended in March. The bank cited “exceptionally strong mortgage banking results” as a key factor.
The bank earned good fees as low interest rates drove 450,000 customers to buy new homes or, more often, to refinance existing loans to lower their monthly payments.
This isn’t an all-clear signal for the troubled banking industry, which still faces rising loan defaults in the current recession. But it’s a welcome bit of good news.
In morning trading, the Dow Jones Industrial Average jumped by triple digits to above the 8000 level. In early trading, Wells Fargo’s share price surged 25 percent, and had a ripple effect on the nation’s other megabanks: Share prices gained 20 percent at Bank of America, 12 percent at JPMorgan Chase, and 9 percent at Citigroup.
Low interest rates and the resulting rise in mortgage activity promises to help the whole industry.
“It’s going to help them pick up some fees,” says Brian Bethune, an economist who tracks the financial sector at IHS Global Insight in Lexington, Mass. “There are definitely signs that credit is starting to flow in that market.”
Mortgage rates have fallen below 5 percent on 30-year fixed-rate loans, causing a rush by people who are able to refinance from higher-rate loans.
Federal policies to help banks and the economy may be helping in several ways.
Fannie Mae and Freddie Mac, despite facing their own loan losses, are using federal support to continue to guarantee mortgage loans that conform to their standards. That means banks “can certainly have a choice as to how much risk they keep on their books,” and how much they off-load via Fannie or Freddie, Mr. Bethune says.