Allâ€™s Wells that lends well
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Being boring continues to be highly profitable for Wells Fargo. The nationâ€™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 FTâ€™s Tom Braithwaite explains why Wells Fargoâ€™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 Fargoâ€™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 â€ścompany is pretty plain vanilla… Iâ€™ve never seen us be more transparentâ€ť. Matt Levine puts it a different way: â€śif Wells is a giant hedge fund, itâ€™s a pretty boring oneâ€ť. If Wells is putting its cash into opaque investments rather than lending it out, Levine writes, itâ€™s mostly investing in very low-risk assets. Wells just has â€śmore cheap funding than it knows what to do withâ€ť.
Wells shareholderÂ Warren BuffettÂ doesnâ€™t share Eisinger and Portnoyâ€™s worries. US banks, he says, â€świll not get this country in trouble, I guarantee it… The capital ratios are huge, the excesses on the asset side have been largely cleared outâ€ť. (Buffett is an investor in four of Americaâ€™s seven largest banks.)
For the moment, those excess deposits seem to be invested very conservatively, which means that Buffett may be right. But thereâ€™s still nothing, really, to stop that cash from someday ending up in CDX.NA.IG.9. — Ben Walsh
On to todayâ€™s links: