Wells Fargo (WFC), the largest U.S. home lender, said second-quarter profit climbed 19 percent as the company clamped down on expenses.

Net income advanced to $5.52 billion, or 98 cents a share, from $4.62 billion, or 82 cents, a year earlier, the San Francisco-based company said today in a statement. The average estimate of 33 analysts surveyed by Bloomberg, excluding some items, was 93 cents a share.

"Expenses are probably between $500 million and $1 billion too high," Marty Mosby, an analyst at Guggenheim Securities LLC, said in an interview before results were disclosed. "That's a cushion they are whittling down."

Chief Executive Officer John Stumpf, 59, scrapped his 2011 cost-cutting goal to invest in businesses such as home lending. With interest rates now climbing from record lows, the bank has forecast that new mortgages will slide for the rest of this year, and Stumpf has renewed his focus on expenses.

The reductions could come in employee benefits, as well as foreclosures, regulatory settlements, and mortgage servicing and repurchases, Chief Financial Officer Tim Sloan said at a June investor conference. Those housing-related expenses cost the company about $3.9 billion last year, he said.

Wells Fargo originated almost 1 in 3 U.S. mortgages in 2012, helping the lender post a third straight year of record profit. Yields climbed after Federal Reserve Chairman Ben S. Bernanke indicated May 22 the central bank may slow monthly bond purchases. The average rate on 30-year fixed-rate mortgages jumped more than a percentage point from early May to 4.46 percent at the end of June.

New home loans fell rapidly after Bernanke's comments and probably slowed Wells Fargo's mortgage business, Richard Staite, a London-based analyst at Atlantic Equities LLP, wrote in a June 12 report. Mortgages comprised about 14 percent of total revenue last year, a contribution that may plunge by more than a third this year to $7.5 billion, from $12.2 billion last year, and to $4.8 billion in 2014, he wrote.

Nationwide, home-loan originations may fall 10 percent to $1.57 trillion this year from $1.75 trillion last year, the Mortgage Bankers Association forecast in a June 20 report.

Wells Fargo closed at a record $42.83 on July 8, and fell 0.4 percent to $41.89 in yesterday's New York trading. That left the stock up 23 percent this year, compared with a 24 percent gain for the 24-company KBW Bank Index. Berkshire Hathaway Inc., run by billionaire Warren Buffett, is the biggest stakeholder with more than 8 percent of the common stock, according to data compiled by Bloomberg.

Staite is among at least five analysts who downgraded Wells Fargo in the past month, giving the stock the equivalent of a sell rating. Chris Mutascio, a Baltimore-based analyst at Keefe, Bruyette & Woods Inc., Jack Micenko at Susquehanna Financial Group LLLP and Scott Siefers of Sandler O'Neill & Partners LP cut their ratings to hold this month.

Wells Fargo and New York-based JPMorgan Chase & Co., which reported a 31 percent jump in quarterly profit today, kick off earnings season for U.S. banks. Citigroup Inc., based in New York, will announce July 15 and Charlotte, North Carolina-based Bank of America Corp. reports July 17.

Lenders have turned to firing workers, cleaning up bad loans and settling litigation to cut costs and boost earnings amid weak borrowing by U.S. businesses and consumers. Commercial and industrial loans rose 0.4 percent in May from a year earlier, while real estate debt contracted 3.3 percent, Fed data show.

"Economic growth is so tepid and there is enough uncertainty out there that is holding back the small and medium businesses from expanding," Mosby said. "That's putting everything in a holding pattern."

The biggest U.S. lenders, after years of building equity and promising higher payouts, may be forced to hoard profits as they face stricter capital rules. Eight of the largest firms would need to retain capital equal to at least 5 percent of assets, while their banking units would have to hold a minimum of 6 percent, U.S. regulators proposed July 9. The banks have until 2018 to fully comply.

Wells Fargo meets both thresholds already, according to analysts at KBW.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.