All’s Wells that lends well
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Being boring continues to be highly profitable for Wells Fargo. The nation’s largest bank by market cap reported $5.1 billion in earnings today, another record quarter. Lending continued to grow, and the bank originated $125 billion in mortgages, up 2% from last quarter.
The FT’s Tom Braithwaite explains why Wells Fargo’s shares went down rather than up today: its net interest margins — the profit it makes on the difference between what it borrows at and what it lends at — continues to fall. The WSJ reports that banks like Wells Fargo have too many deposits and complain of having too few creditworthy borrowers:
Deposits reached a record $10.6 trillion at the end of 2012, according to Market Rates Insight Inc., a San Anselmo, Calif., firm that tracks deposit data. Meanwhile, the share of each deposit dollar that banks lend out hit a post financial-crisis low in the third quarter.
But is Wells Fargo’s business model still too opaque for investors or regulators to comprehend, as Jesse Eisinger and Frank Partnoy argue? Wells Fargo CEO John Stumpf was dismissive: the “company is pretty plain vanilla… I’ve never seen us be more transparent”. Matt Levine puts it a different way: “if Wells is a giant hedge fund, it’s a pretty boring one”. If Wells is putting its cash into opaque investments rather than lending it out, Levine writes, it’s mostly investing in very low-risk assets. Wells just has “more cheap funding than it knows what to do with”.
Wells shareholder Warren Buffett doesn’t share Eisinger and Portnoy’s worries. US banks, he says, “will not get this country in trouble, I guarantee it… The capital ratios are huge, the excesses on the asset side have been largely cleared out”. (Buffett is an investor in four of America’s seven largest banks.)
For the moment, those excess deposits seem to be invested very conservatively, which means that Buffett may be right. But there’s still nothing, really, to stop that cash from someday ending up in CDX.NA.IG.9. — Ben Walsh
On to today’s links: