Wells Fargo (WFC) is still betting big on the mortgage market it dominates, hiring lenders and support staff and aggressively courting first-time homebuyers as refinancings wane.
The San Francisco bank's top executives said Friday that they remain bullish on the U.S. mortgage business, even as refinancing activity slows. Wells increased its mortgage staffing last quarter, despite a 13% drop in origination volume from the previous three months, as the bank looks to benefit from a rebound in home sales.
"The mortgage business is still very strong," Chief Financial Officer Tim Sloan told analysts during a conference call shortly after the bank released its first-quarter earnings report.
"Remember, housing is improving every day," added Chief Executive Officer John Stumpf. "Americans have not lost their emotional attachment to homeownership."
In 2012, Wells Fargo originated one out of every four residential mortgages in the United States, according to the company. "We would think that they would be able to hold that market share," says Marty Mosby, an analyst with Guggenheim Partners. "There's not a lot of new entrants."
Wells reported that its first mortgage applications were down 8% from the previous quarter and 25% from the first quarter of 2012. But the share of those applications that were refinances fell sharply in the first quarter.
A year ago, refinances made up 76% of the bank's first mortgage applications, but that number dropped to 65% in the first quarter of 2013. During the first three months of the year, Wells Fargo originated 31% more mortgages on home purchases than it did during the same period a year ago, according to the bank.
"We've got more people on the street out there meeting with home builders and realtors and home buyers, and we want to help them buy their first home," Sloan said in an interview
For several months, Wells has been reassuring investors that it can respond quickly to a fall-off in the mortgage business by reducing its costs.
Although top executives at Wells made that point again Friday, their focus was more on consolidating their dominant position in the mortgage market. The company has reduced the period of time it takes to process and approve a mortgage application from 90 days to 60 days, which will provide a competitive advantage, Sloan said.
Stumpf brushed off an analyst's question about whether the recent improvement in the U.S. housing market is being driven by low interest rates, which will eventually rise.
"I would say the housing market is as much driven by confidence and by improvement in value as it is by rates," Stumpf said.
Wells executives also spoke highly about the value of their mortgage servicing business, but those remarks drew a skeptical reaction from Kevin Barker, an analyst at Compass Point Research & Trading, in light of the fact that Wells has recently sold some mortgage servicing rights.
"Actions speak louder than words," Barker wrote in a research note, predicting the bank will continue to manage the size of its mortgage servicing portfolio.
Despite the drop in mortgage revenues last quarter, Wells reported record net income of $5.2 billion. That worked out to 92 cents per share, which beat the 88-cent consensus of analysts surveyed by Bloomberg. The company's earnings per share have now hit a new record for eight consecutive quarters.
But in a sign of just how high the bar has been raised for Wells Fargo, its shares were trading down 1.5% on Friday afternoon.
Analysts were pleased with Wells' net charge-off rate, which fell to 0.72% in the first quarter, reflecting tighter loan standards in the wake of the financial crisis. But they had questions about the bank's failure to more quickly improve its efficiency ratio (a metric that compares expenses with revenues).
Wells Fargo' efficiency ratio in the first quarter was 58.3%, which is near the high end of the company's 55% to 59% target range.
One way to reduce expenses might entail reducing the size of some of Wells Fargo's 6,000 or so locations nationwide. And indeed, the company announced plans Friday to open its first mini banking store next week in Washington, D.C. The store will be 1,000 square feet, which is only about one-quarter or one-third the size of a traditional location.
But the company does not have a plan to convert a specific number of its stores to smaller footprints, executives said during Friday's conference call.
CFO Sloan said that it will take many different changes, including better use of technology, to improve Wells Fargo's efficiency.
"There's no one kind of magic change that we can make," he said. "There's literally hundreds of projects that are going on right now inside the company that are focused on reducing costs."