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Wells Fargo: A Financial Powerhouse Known for High Profitability – Can it Sustain This?

July 28, 2012 | About:
Muhammad Bazil

Muhammad Bazil

3 followers
Wells Fargo (WFC) is the largest home lender in the U.S. and one of the largest banks in the United States. Wells Fargo is a financial holding company with global operations similar to JP Morgan Chase (JPM) and Citigroup (C). But unlike many other large U.S. banks which have recently been in the spotlight for committing avoidable financial blunders (note that JP Morgan Chase was in the spotlight recently for recording a trading loss of about $5 billion), Wells Fargo remains a stable bank holding company with excellent financial records over the past few years. Wells Fargo is well diversified with its investment interest in financial offers, such as banking, home lending and insurance services. On earnings and dividend payouts, Wells Fargo is a stable performer which has rewarded its shareowners with impressive and consistent quarterly dividend payouts and stable growth earnings. Wells Fargo presently offers a dividend yield of 2.55%.

As the largest home mortgage lender in the United States, Wells Fargo is unarguably positioned to benefit immensely from the imminently expected housing recovery. Fortunately, a recent National Housing Reportstated that recovery in the housing sector was fast gaining momentum, as sales and prices rose higher in June. Also, the July record of the National Association of Home Builders shows a higher monthly index of 35 which was regarded as the highest since 2007. This improved confidence in housing means that the earnings and revenue of Wells Fargo will certainly receive a boost soon, making its stock a good buy now. Already, the second quarter financials of Wells Fargo and the next three largest lenders, JP Morgan Chase, U.S Bancorp (USB) and Bank of America (BAC), have all received boosts in profits as many homeowners are now taking advantage of low interest rates to continue to refinance the homes they currently own.

Wells Fargo’s second quarter results show that the company recorded a drop in expenses and earned 82 cents per share on a net income of $4.62 billion from $3.95 billon. That income level was an increase of 17 percent year-over-year, though its revenue remained flat at $21.3 billion. In comparison to Wells Fargo, JP Morgan Chase, a company with wider exposure to the Eurozone financial crisis, recorded a loss of about $4.4 billion pre-tax in its second quarter results on $5 billion earnings, mainly due to its high loan loss coverage ratio estimated at about 2.74%. Though regrettable, I’m of the opinion that investors shouldn’t let the JPM quarter loss prevent them from seeing the core profit potentials of this bank holding company.

Unlike JP Morgan, the unimpressive quarter results of Citigroup stemmed from its exposure to emerging markets in Asia and Latin America rather than exposure to European banks. On the other hand, Bank of America reported an improved quarterly result, considered as one of its better results since the 2008 economic recession era, though its earnings for the period were about $2.5 billion.

Wells Fargo has announceda quarterly common stock dividend of 22 cents per share and the dividend is payable to shareholders as of September 1 of this year. The earnings strength of Wells Fargo comes mainly from its mortgage and commercial loans. In the U.S. mortgage sector, Wells Fargo created a third of the market with a record number of new applications reported as a result of the incentives of continued low rate regime, which motivates many Americans to apply for loans to purchase new homes or re-finance the homes they presently own. The current trend in mortgage income is bound to continue to drive the revenue of Wells Fargo higher as long as the prospect of housing for Americans continues on a brighter note. In addition, the balance sheet of Well Fargo is solid with $1.3 trillion in assets in comparison to its total liabilities of about $1.17 trillion. Therefore, the company has a bright prospect of future revenue growth and better earnings. Since Wells Fargo remains stable, has the prospect of growth and better earnings, and it’s positioned to benefit more than its competitors from housing recovery, I strongly believe that its stock price has the chance of being driven higher. Therefore, I’m long on Wells Fargo.

About the author:

Muhammad Bazil
Muhammad Bazil is a financial journalist and editor for a variety of websites, public policy organizations, and book publishers. He has written hundreds of published articles and blog posts on topics including budgeting, credit management, real estate and investing. His articles have been featured on the homepage of Yahoo!, MSN and numerous local news websites.

Rating: 3.2/5 (11 votes)

Comments

softdude2000
Softdude2000 - 2 years ago
Warren Buffett recently said mortgage market not too past was $3T and hoped WFC could capture a third of it. Can someone explain what was counted in $3T number (mortgage originations, MSRs..). US value of ALL houses is around 17T and commercial real estate may be 6T. how can there be 3T revenue on 23T total value. Was there a 14% turnout every year in the market?

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