The mortgage industry is one of the leading business sectors in the United States. For mortgage service providers, profitability depends on the volume and the prevailing interest rates. In the United States, JPMorgan Chase & Co. (NYSE:JPM), Citigroup Inc (NYSE:C), Bank of America Corp (NYSE:BAC) and Wells Fargo & Co (NYSE:WFC) are among the leading home-mortgage service providers. Five of the largest banks in the nation have a market share of more than 53.2%.
According to FBR forecasts, small lenders will grow in the future and will be able to cover almost 40% of the market share by the end of 2014. Therefore, the future will be even tougher for the largest mortgage lenders.
Wells Fargo’s business mix
Wells Fargo & Co (NYSE:WFC) is a bank and financial-services holding company. It is divided into three business segments: wholesale banking, community banking, and brokerage and retirement. It also provides financial services through subsidiaries in the field of commercial banking, corporate banking and investment banking. In short, the bank has a very diversified business model.
Since Wells Fargo is one of the largest home lenders in the US, its home-lending unit is a key profit driver for the bank. The bank’s home-lending unit offers home buying, refinancing solutions and renovation financing. The unit reported results that were below expectations for the first quarter.
Financial overview
In the first quarter of 2013, Wells Fargo & Co (NYSE:WFC) reported net income of $5.2 billion, up 22% over the year-ago period. Wells Fargo’s stock is currently trading at $39.26 per share. Over the last two months, the share price increased 6%. The most recent EPS results were $3.53, compared to JPMorgan Chase & Co. (NYSE:JPM) and Citigroup Inc (NYSE:C)’s most recent EPS of $5.60 and $2.72, respectively. Due to effective cost controls, Wells Fargo & Co (NYSE:WFC)’s operating expenses decreased by 7.8% over the prior quarter.
Wells Fargo and mortgage banking
The bank’s shareholders don’t need to be worried about the decline in the bank’s market share in US-mortgage originations. According to the latest news, Wells Fargo & Co (NYSE:WFC)’s mortgage-banking activity is expected to show healthy results in the coming quarters. A recent surge in the share price was driven by overall healthy housing market activity. In the first quarter of 2013, the median resale home price jumped 11.3%, which is the biggest rise in the last seven years.
Nonetheless, Wells Fargo reported a decline in its mortgage-banking business at the end of the most recent quarter. In the first quarter of 2013, total mortgage revenue was $2.8 billion, down 9% over the previous quarter, while mortgage originations dropped 16%.
Wells Fargo & Co (NYSE:WFC)’s home-loan application revenue at the end of the first quarter of 2013 was $74 billion, down from $81 billion in the year-ago period. Wells Fargo is still the market leader in the US mortgage market with a market share of 33.9%, while JPMorgan Chase & Co. (NYSE:JPM) occupied the second place with a 10.6% market share.
Higher interest rates
Besides, the bank is also expected to benefit from the rising interest rate environment. Bloomberg reported that rising interest rates will mean higher revenue for the bank. However, the exact source of additional revenue was not mentioned, but I believe its the asset-liability gap. The bank’s liabilities are more sensitive to changes in interest rates than its assets. Therefore, rising interest rates will lead to a greater decline in the liabilities than in the bank’s assets, causing the bank to recognize more interest income on assets.
Competitive analysis
Citigroup Inc (NYSE:C)’s new CEO Michael Corbat has an aggressive plan for the bank, which will turn out positive results in the future. However, the bank continues its policy of pulling back on mortgages. The bank noted that mortgages are not a big business for Citigroup Inc (NYSE:C). This is despite strong mortgage-banking volumes during the first quarter of the current year. Citigroup group is well positioned, with an international presence in more than 160 countries, and in Asia it is the most active mega bank.
In contrast, JPMorgan Chase & Co. (NYSE:JPM) reported a 37% increase in its mortgage business during the first quarter of 2013. The vote regarding JPMorgan’s separation of the chairman and CEO roles was held on May 21, in which Dimon won a vote of confidence and shareholders agreed that he may keep dual roles. After this decision, JPMorgan Chase & Co. (NYSE:JPM)’s share price has surged by 4.5% to date.
JP Morgan’s and Citigroup Inc (NYSE:C)’s EPS are estimated to be increased to $5.67 and $4.70, respectively, for 2013. JPMorgan said that it will make $5 billion over a one- year period if interest rates went up 300 bps but it could be difficult to predict how JPMorgan Chase & Co. (NYSE:JPM) will make this money. Some investors believe that the bank’s $5 billion refers to lending profit.
Bank deposits
As for retail banking, Wells Fargo & Co (NYSE:WFC) captured high deposits in the Northern Plains. Wells Fargo reported a 9.3% increase in its deposits in North Dakota and 5.9% in Montana. Booming oil production in the Northern Plains attracted investors and job hunters. As the economy expands, lenders with a significant presence may increase their deposits in the future.
Conclusion
In the first quarter of 2013, Wells Fargo & Co (NYSE:WFC)’s financial performance improved over the quarter due to a decline in expenses and an increase in operating income. However, its mortgage-banking income did not come in as anticipated. But according to the latest news, Wells Fargo is experiencing growth in the mortgage industry due to which shares recently rose 1.6%. I believe the rebounding US housing market is the biggest positive driver for Wells Fargo in the current and coming quarters.
Red Chip has no position in any stocks mentioned. The Motley Fool recommends Wells Fargo. The Motley Fool owns shares of Citigroup Inc (NYSE:C) , JPMorgan Chase & Co. (NYSE:JPM), and Wells Fargo & Co (NYSE:WFC).
The article A Rebounding Housing Market will Help this Bank originally appeared on Fool.com.
Red is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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