Wells Fargo profit drops for second straight quarter as costs rise

Wells Fargo profit drops for second straight quarter as costs rise

By Neha Dimri & Anil D'Silva

(Reuters) – Wells Fargo & Co, the largest U.S. mortgage lender, reported a drop in profit for the second straight quarter as employee costs & other expenses rose at a time when it is struggling with slow revenue growth.

Lower interest rates have crimped the bank's net income for the past two quarters, ending its five-year run of rising profits that was driven by a mortgage refinancing boom.

p>Although Wells Fargo & other major U.S. banks have been making more loans, their net interest income growth has been sluggish due to low lending rates.

Banks' net interest income has been under pressure moreover as lower-yielding loans replace higher-yielding assets.

Wells Fargo's net interest income rose 4 percent in the second quarter ended June 30, a massive drop from the 97.5 percent growth it reported for the first quarter of 2009.

The bank expects the acquisition of a $9 billion commercial loan portfolio from General Electric Co to add to its interest income in the current quarter, Chief Financial Officer John Shrewsberry said on a conference call on Tuesday.

Net interest margin, the difference between the rates at which the bank borrows & lends, fell to 2.97 percent from 3.15 percent a year earlier.

Non-interest expenses rose 2.3 percent to $12.47 billion, accounting for approximately 58.5 percent of revenue, the higher end of its targeted range of 55-59 percent.

Mortgage banking revenue, which accounted for 17 percent of its non-interest income, fell 1 percent.

"Mortgage banking was a little weaker than I had thought … that was a little bit of a disappointment," Sandler O'Neill analyst R. Scott Siefers said.

Wells Fargo made $62 billion of home loans in the quarter, up from $47 billion a year earlier & $49 billion in the first quarter.

However, the bank expects to make lower mortgage loans in the third quarter as refinancing activity slows ahead of an expected rate hike by the Federal Reserve.

JPMorgan Chase & Co reported a stronger-than-expected rise in quarterly profit earlier on Tuesday as legal & restructuring expenses declined.

Net income applicable to Wells Fargo's usual shareholders fell to $5.36 billion from $5.42 billion.

Total revenue rose approximately 1 percent to $21.30 billion.

Wells Fargo's shares were up approximately 1 percent at $57.16 on the New York Stock Exchange. The stock is trading at 1.5 times its book value, while shares of other major banks are trading at 0.7-1.1 times.

(Editing by Kirti Pandey)

net interest income

Source: “Reuters”

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