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Wells Fargo on Friday reiterated its plans to slash costs over the next year, but executives gave themselves flexibility to rethink those cuts later.
April 13 -
A surge in mortgage lending drove strong profits for banks of all sizes in the first quarter, with some banks attributing the improvement to new regulations.
April 26 -
Wells Fargo plans to give its underwriters more control in approving mortgages that it retains in its own portfolio, as the bank tries to add high-quality assets to its balance sheet.
May 1
Wells Fargo (WFC) will be able to hit a 12% to 15% return on equity by fine-tuning its business lines and controlling its costs, bank executives asserted in Tuesday investor presentations.
The event was in some ways a celebration of the bank's retail-focused business model, which has benefited from its concentration in its key markets and high cross-selling rates. While Wells has earned a sizable portion of its income from its capital markets activities in recent years, executives on Tuesday sought to stress the primacy of its core banking businesses and its ability to weather a low-interest rate environment.
In the near term, Wells expects its quarterly expenses to drop from the $13 billion it reported as of March 31 to $11.3 billion by the end of the year. $500 to $700 million of that will come in the second quarter from lower seasonal costs and the end of expenses related to the bank's 2009 purchase of Wachovia. Another $1 billion will come later in the year from headcount reductions and decreased costs stemming from lower mortgage origination volumes.
The event in New York was built around presentations by the heads of various Wells Fargo business division heads.
Avid Modjtabai, the senior executive vice president for consumer lending, highlighted growth in the bank's credit card portfolio. New credit card originations were up 76% year over year in the first quarter, and the bank expects to add additional accounts by cross-selling to customers in its wealth management business.
Modjtabai also talked up Wells' private lending business. While many of the bank's large competitors have announced plans to pull out of a market shrunk by the prevalence of government loans, Modjtabai said, "Student lending is important to us because it's important to our customers…. There's a need to have the gap [between federal loans and education costs] be funded."
While the $7 to $10 billion private loan market isn't sizable enough to produce significant earnings for Wells, the bank sees it as a way to recruit new business.
"We get the customer and the parent," Modjtabai said, describing the customer base as an attractive niche. 80% of the student lending operation's loans are cosigned, she said, and the banks new originations have FICO scores of 700 or above.
"Our net charge-offs are 2% and trending down," she said.
Wells Fargo's mortgage division is happy to take on market share as other major banks reduce their positions and eliminate correspondent lending, said Mike Heid, executive vice president and head of Wells Fargo's mortgage business.
The bank's retail origination already dwarfs that of its competitors, with the bank producing $192 billion of mortgage loans in 2011 - double that of JPMorgan Chase (JPM), the second largest originator. Along with dominating the market for conforming mortgages guaranteed by the government, the bank has more than doubled its portfolio of high-balance, non-confoming loans since 2009, with its holdings now at $35 billion.
The loans have a tremendous credit quality, Heid noted, with a 68% loan-to-value ratio and only 21 of the 40,000 loans that the bank has originated since 2009 ever becoming seriously delinquent.
Wells Fargo's mortgage hedging has been just as important to the bank's earnings in recent years as its actual mortgage business, with total gains of $17 billion since 2009 and a cumulative $8.3 billion contribution to Wells earnings, after accounting for hefty write-downs in the value of the bank's mortgage servicing rights.
While this money was earned from the bank's positions in the capital markets, Heid went to pains to separate it from the sort of wagering that has
"This is not a trading activity in any share or form, and we've charted a different course from most of our large peers," Heid said. While most large banks house their mortgage hedging operations inside their corporate treasury departments, Wells keeps its trading firmly in the mortgage division and largely bets on mortgage forwards instead of treasury futures or other interest rate derivatives.
Heid sought to characterize the bank's gains as "carry income," a natural offshoot of the mortgage futures it uses to hedge. A
Heid also addressed regulatory threats to Wells' mortgage franchise. Heid said that the bank has servicing quality issues well under control, and said that prospective international rules limiting mortgage servicing right assets to 10% of the bank's capital would not drive an immediate change in Wells' strategy.
"The book of business we're originating right now is probably the best book of business we've seen in a long, long time," Heid said. "Which makes acquiring the current base of customers very attractive."
If the Basel rules are implemented as is, however, "we've got choices in front of us that others may not," he added. Real Estate Investment Trusts and other entrants to the mortgage industry may be interested in acquiring MSRs without taking on responsibility for servicing loans themselves.
"You're already starting to see developments where other entrants are buying the servicing asset, not the platform," he said, adding that Wells might consider "develop[ing] the security market for the asset ownership."
Should Wells end up lacking alternatives when MSR capital restrictions go into place, Heid said, the bank could still cope.
"If it comes down to having to phase in or change some of the origination, we would deemphasize aggregation and emphasize our direct channel," he said.
