Wells Fargo's Results Will Affect These U.S. Banks

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Wells Fargo
WFC
did not disappoint with its earnings report this morning, with a jump in profits of 20% thanks to increased mortgage activity in the U.S. market. Wells Fargo reported net income of $4.11 billion, or 73 cents per share, up from $3.41 billon last year. Previous estimates had set profits at 72 cents per share. Revenue, however, was down by 4%, down to $20.6 billion, but this was still higher than analysts expectations of $20 billion. Investment banks have seen revenues fall due to volatile markets and lower trading volumes, as well as lower rates and a stubbornly sluggish economy. John Stumpf, Wells Fargo's CEO, has said that his company will try to cut $1.5 billion in costs to improve the company's profit margin, although Stumpf also said in a statement that he was "extremely pleased with Wells Fargo's performance in 2011." Despite less opportunities in the investment banking sector, Wells Fargo was able to increase its profits by a more aggressive investment in mortgages. Demand for mortgages, especially on single-family homes, increased in 2011 largely thanks to lower interest rates that are moving many to refinance their pre-existing homes. Wells Fargo originated $120 billion worth of mortgages in Q4 2011, up from $89 billion in the Q3. This is despite a seasonal slowdown in mortgages and new home sales in winter. The increased mortgage revenue was especially profitable for the bank since its marginal profit between its cost for funds and its earnings from loans and securities was up .05% from 3.85% in Q3. Wells Fargo's strong earnings are a sharp contrast to expectations from Citigroup
C
, which reported lower earnings than expected. Wells Fargo also over performed JPMorgan
JPM
relative to expectations, largely because of Wells Fargo's more aggressive investment in the residential mortgage sector. Bank of America
BAC
is scheduled to report its earnings on Thursday, with experts forecasting a modest increase in earnings and revenues. Bank of America has underperformed the rest of the banking sector and hasn't seen the sorts of gains that Wells Fargo has seen. How should investors play the Wells Fargo earnings? The stock is certainly going to climb in today's trading above its .25 (0.84%) gains in pre-market trading, but it's uncertain how well the bank will do today if more bad news from Europe drags on the entire banking industry. This would be unfair, since Wells Fargo has less exposure to Europe than almost any other bank, unlike Goldman Sachs
GS
and JPMorgan, whose exposure to the PIIGS markets is in the billions. Nonetheless, Bank of America is a particular bargain, and almost everyone in the market knows it. Wells Fargo's strong earnings might inspire speculation in Bank of America as investors foresee a jump in large commercial banks thanks to a resurgent mortgage market. On the other hand, these two stocks have minimal exposure to Europe, so if talks about Greece fail this week, they should not be hit as heavily as the other U.S. investment banks, let alone the European ones. However, they can still be hit hard if investors expect a turn for the worse in Europe.
Neither Benzinga nor its staff recommend that you buy, sell, or hold any security. We do not offer investment advice, personalized or otherwise. Benzinga recommends that you conduct your own due diligence and consult a certified financial professional for personalized advice about your financial situation.
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