Wells Fargo (WFC, Financial), America’s largest mortgage lender, shared first quarter EPS of $1.04, a slight drop from $1.05 a share in the previous quarter. The company exceeded expectations when delivering quarterly earnings on Tuesday after posting a rise in revenue to $21.28 billion from $20.63 12 months ago.
However, Wells Fargo also reported a first-quarter earnings drop of 1.5% for the first time in over four years, as America’s fourth-largest bank in terms of assets continued facing pressure in terms of its lending margins.
Wells Fargo, a San Francisco-based bank, reported profits of $5.8 billion which was a drop from a record profit of $5.89 billion during the same period of 2014. Analysts were expecting 98 cents per share, which was exceeded by Wells Fargo.
At a time when the banking sector is struggling to raise margins thanks to low interest and strict capital requirements, Well Fargo’s net interest margin fell to 2.95% in the first quarter ending March 31 down from 3.20% the same time last year. Net interest margin is a key measure of profitability.
Climbing expenses
Expenses went up by 4.7% from a year earlier to $12.5 billion thanks to rising commissions and paying employees their incentives.
Investment banking fees increased by 36% from the previous year to $445 million. Revenue from brokerage increased 6% to $2.38 billion. Less than 1% gain was seen from trust and investment management fees. Total gain was $852 million.
Well Fargo CEO John Stumpf has taken steps to add loans that include purchasing portfolios from the bank’s competitors. Wells Fargo made plans to buy performing mortgages on commercial real estate from General Electric Co. (GE, Financial) who decided to exit the real estate finance business.
Mortgage revenue
Mortgage banking revenue went up 2.5% from the previous year hitting $1.55 billion, the highest since 2013’s fourth quarter. $44 billion in mortgages were slowly being completed towards the end of the quarter.
Thirty-year residential mortgage rates dropped 0.20% in the first quarter to measure at 3.79%.
Bright spot for the company
Loan growth was being seen as a positive area for Wells Fargo with total number of loans by the end of the first quarter added up to $861.23 billion, a 4.2% rise from $826.44 billion in the same period 12 months ago.
Commercial and Industrial loans constitute the largest part of Wells Fargo’s portfolio, and this sector saw a growth of $271.1 billion, a rise of 13% from $239.23 billion in 2014’s first quarter. In recent quarters, Wells Fargo started focusing on auto and credit card loans and these divisions saw growth spurts of 7% and 15% respectively.
Analysis
Wells Fargo’s strengths lie in many different areas such as its revenue growth, increase in stock price during the last year, a net income increase, growth in earnings per share and expanding profit margins.
These strengths outweigh the fact that Wells Fargo has weak operating cash flow. This gives Wells Fargo a BUY rating by most analysts.
The bank’s net income growth from this quarter last year exceeded that of the S&P 500. The net income rose by 1.8% when compared to the same quarter last year, rising from $5,610 million to $5,709 million.
During the last fiscal year, Wells Fargo increased its bottom-line earnings per share to $4.10 compared to $3.89 in the previous year. In 2015, expectations for Wells Fargo are for an improvement in earnings. Well Fargo’s gross profit margin is high at 93.37%. Wells Fargo’s net profit margin of 25.43% outperforms the rest of industry.
All these reasons add up to making Wells Fargo a good addition to an investor’s portfolio.
