While JPMorgan Chase & Co. (NYSE:JPM) and Bank of America Corp (NYSE:BAC) were able to report increases in mortgage originations during the first quarter, Wells Fargo & Company (NYSE:WFC) reported a decline. The remainder of the investment thesis aims to explore the ways Wells Fargo will overcome this decline in the coming quarters.
Slowdown in mortgage banking activity
During the first quarter, Wells Fargo & Company (NYSE:WFC) reported an earnings beat on revenues that remained behind expectations. However, the results were a cause of concern for the bank’s investors and analysts as Wells Fargo reported decline in its mortgage banking activity. Total mortgage banking revenues for the first quarter came in at $2.8 billion, down 9% over the prior quarter. Mortgage originations volume declined 13% over the prior quarter to $109 billion. At the same time, the bank’s mortgage production revenues plunged 12% and the mortgage banking fees dipped 9% over the linked quarter. What is more concerning is that the bank’s mortgage application volume of $140 billion came down 8% sequentially, which resulted in an 8.6% decline in the mortgage pipeline for Wells Fargo & Company (NYSE:WFC).
To overcome the slowdown in the mortgage banking activity, the management at Wells Fargo is all set to expand its home-lending headquarters in Iowa. The bank plans this expansion at a time when the industry predicts a slowdown in the entire market.
Construction on a building that will ultimately house bank 1800 workers has already started. The building, when completed will increase capacity by 28% or 265,000 square feet. The entire expansion project is considered to cost around $100 million to Wells Fargo & Company (NYSE:WFC). Besides providing room to current mortgage banking team members, the building will allow space for future growth in the mortgage banking division of the bank.
This reflects the fact that Wells Fargo & Company (NYSE:WFC) is considering expanding its headcount, particularly in its mortgage banking division. This expansion in the office space and mortgage banking headcount comes at a time when Mortgage Bankers Association predicts home lending will slow down by around 16% this year.
Besides, the aforementioned expansion, Wells Fargo is considering expanding its mortgage operations in Tempe, Arizona and plans to hire around 900 employees there after construction on its 111,349 square-foot office facility completes.
Wells Fargo & Company (NYSE:WFC) expanded its mortgage banking unit’s capacity during the third and fourth quarter of the prior year despite the US housing markets slowdown. The slowdown was so intense that the Fed initiated the third round of easing better known as QE3 in order to support the US housing markets. Wells Fargo & Company (NYSE:WFC)’s strategy paid off and the bank became the market leader in the US home lending, originating a third of the loans issued in the US.
Competition
Among Wells Fargo’s major competitors are Bank of America Corp (NYSE:BAC) and JPMorgan Chase & Co. (NYSE:JPM). Bank of America reported an earnings miss on revenues that surpassed their estimates. The bank’s earnings were hit by legal settlements, while the earnings were well supported by better expense management under the bank’s Project New BAC. JPMorgan Chase reported a positive EPS surprise of 15% during the first quarter on a revenue beat. However, both reported higher mortgage originations during the first quarter. JPMorgan Chase & Co. (NYSE:JPM) originated $52.7 billion mortgages, compared to Bank of America Corp (NYSE:BAC)’s $25.04 billion during the first quarter. Mortgage originations at JPMorgan and Bank of America increased 3% and 11%, respectively, over the prior quarter.
Besides, Wells Fargo’s intended increase in its mortgage banking unit’s headcount comes at a time when JPMorgan Chase & Co. (NYSE:JPM) has shown its intention of decreasing its mortgage banking unit’s headcount by around 14,000 jobs.
Conclusion
Wells Fargo seems to be committed in retaining its top market share in the US mortgage markets. For this reason it has started a expanding its office facilities at different locations. Besides, the bank will hire more employees once the facilities are expanded. Therefore, I believe history will repeat itself and Wells Fargo will benefit from the recovering US housing markets as it did during prior quarter, which is why I have a buy rating for the stock.
The article Will History Repeat Itself for Wells Fargo? originally appeared on Fool.com.
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