CHICAGO--(BUSINESS WIRE)--Wells Fargo & Company (WFC) reported its 14th quarter in a row of higher net income, with a very strong 1.55% return on assets for 2Q'13. A significant drop in provision expenses drove most of the sequential quarterly increase. Earnings were also aided by higher spread income, and controlled non-interest expenses.
WFC reported continued strength in mortgage banking, with results relatively flat on a sequential basis. Mortgage banking accounts for roughly one quarter of non-interest income. While the pipeline fell for the fourth quarter in a row, WFC reported a slight increase in quarterly originations and applications. Further, the refinance/purchase mix continues to improve, reflecting the wind-down of the significant refinancing activities, as well as the recent pick-up in home sales. Fitch would expect WFC to report lower mortgage revenues in 2H'13 reflecting the recent back-up of rates.
Reflecting the strength of the housing market, WFC released $500 million in reserves, compared to $200 million last quarter. In line with the industry, reserve releases have generally been on a declining trend since 1Q'11 for the company. WFC disclosed that absent a material deterioration in the economy, the company expects further reserve releases.
WFC reported strong asset quality improvement, with quarterly net charge-offs (NCOs) falling to just 58bps. Much of the improvement is attributed to better consumer credit quality, particularly 1-4 family residential and home equity performance. That said, Fitch notes that NCOs at this level are likely not sustainable, with historical losses more around the 100bps range.
Other highlights for the quarter include strong growth in trust and investment fees, reflecting higher investment banking and increased retail brokerage asset-based fees. This was somewhat offset by lower market-sensitive revenues, as WFC reported lower gains on trading activities.
Mortgage repurchase expenses fell significantly for the quarter, down to just $65 million, as compared to the prior four quarter average of approximately $450 million. Further, WFC's net interest margin (NIM) compression was just 2bps during the quarter, much better than reported over the past several quarters.
Tier 1 common under Basel III improved slightly to an estimated 8.54% at June 30, 2013. Higher retained earnings were offset by a much smaller contribution from accumulated other comprehensive income (AOCI), as unrealized gains fell approximately $6 billion during the quarter. AOCI had a negative impact on Tier 1 common under Basel III of 24bps during the quarter. As an Advanced Approach bank, WFC will be subject to fluctuations in AOCI under Basel III once it comes into effect Jan. 1, 2014.
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