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.

Nicholas Kamm/AFP/Newscom
Doing better: Wells Fargo CEO John Stumpf spoke to the press outside the White House last month. The bank expects to report about $3 billion in profit for the quarter that ended in March.

A surge in mortgage refinancing activity is generating fees for US banks just when they need it most.

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.

The Federal Reserve, meanwhile, has helped reduce mortgage interest rates by buying lots of the Fannie- and Freddie-backed loans packages. (By creating new demand for mortgage securities, the Fed lowers the going cost of a home loan.)

The Fed has also cut its short-term lending rate essentially to zero, which widens the profit spreads banks can hope for on new loans.

Those policies all provide a boost as banks work through hard times. The industry lost $26 billion in the final quarter of 2008. And default rates on everything from mortgage loans to credit cards have been rising.

The government wants to ensure the industry maintains its ability to lend, so that a credit squeeze doesn’t make the recession deeper or prevent a recovery. That’s the motivation behind yet another federal policy – the Treasury’s move to invest billions of dollars in capital with banks, including Wells Fargo.

Separately, the Obama administration has crafted a foreclosure-prevention policy, which gives banks a financial incentive to modify at-risk loans. The plan also allows many people with loans backed by Fannie Mae or Freddie Mac to refinance – even if the value of their home has fallen a bit below their loan balance.

President Obama pointed to the importance of refinancing at a round table discussion Thursday, sitting alongside cabinet officials and several homeowners who have been able to reduce their monthly housing costs.

“A lot more people can take advantage" of the program, Obama said, urging Americans to find out if they are eligible at the website makinghomeaffordable.gov.

In releasing its numbers, Wells highlighted the point that it is using taxpayer support to extend loans right back to taxpayers.

The bank funded over $100 billion in mortgage loans in the first quarter. It provided 150,000 “mortgage solutions” in the same quarter to help cash-strapped homeowners avoid foreclosure. And it has extended $225 billion in credit to US taxpayers since early last October, when the Treasury bank-rescue fund was launched. That’s nine times the amount of capital Wells received through the Treasury’s capital purchase program.

“Our business momentum is strong, and we expect our operating margins to remain at the top of our peer group,” said Wells Fargo chief executive officer John Stumpf in a statement accompanying the numbers.

The other big banks are also lending and modifying at-risk loans. But analysts say that Wells Fargo is one of the best-managed large banks.

“You can’t extrapolate from what they’ve reported to the other banks,” in terms of industry health, Bethune says. “I think it’s still going to be tough sledding for the banks overall.”

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