NEW YORK — Wells Fargo, the country's biggest mortgage lender, reported record earnings for the fourth quarter on Friday, beating analysts' expectations for both profit and revenue. The bank made more loans, gained deposits and enjoyed above-average returns from the investments made by its private equity business.
In a call with analysts, bank officials also sounded a positive note on their crucial mortgage unit. The housing market, said CEO John Stumpf, began "a steady rebound" in 2012. "There is no doubt," he added, "that a corner was turned."
But investors found the results underwhelming and sent Wells Fargo's stock lower. Although the bank is still funding more mortgages than at any time in 2011, investors were disappointed that the numbers had slipped compared to the previous quarter. Wells Fargo's stock was down 44 cents at $34.96 in midday trading.
As the first major bank to report earnings, San Francisco-based Wells Fargo sets the tone for the rest of the industry. And as the biggest mortgage lender by far — it makes about 30 percent of U.S. mortgage loans, according to the trade publication Inside Mortgage Finance — it's a bellwether for the overall housing market.
Wells Fargo said it funded $125 billion in mortgages in the fourth quarter, up from $120 billion in the same period a year ago. However, that was down from the record of $139 billion it did in third quarter. Mortgage applications were down over both the year and the quarter.
"The absolute levels of each of these data points remains relatively healthy," Stifel Nicolaus analyst Christopher Mutascio wrote in a note to clients, "but they are showing indications that the refinance boom is losing steam."
Seventy-two percent of the fourth-quarter mortgage applications came from customers who wanted to refinance their current mortgages, rather than buy new homes. Refinancing requests have made up at least 70 percent of the bank's mortgage applications in five of the previous six quarters.
That's because the Federal Reserve is keeping interest rates extremely low, a move that it hopes will boost the economy by encouraging individuals and businesses to borrow money and spend. Overall, mortgage rates continue to creep lower. The average interest rate for a 30-year fixed mortgage at the end of December, the close of the fourth quarter, was 3.35 percent, according to Freddie Mac. At the end of September, the close of the third quarter, it was 3.47 percent.
Wells Fargo's dominance in mortgages has helped it cultivate a reputation as one of the strongest banks in the country, adding jobs when others are cutting and beating out JPMorgan as the biggest bank by stock market value.
But the strategy also makes Wells Fargo a target for lawmakers, regulators and customers who blame risky mortgage lending for the 2008 global financial crisis.
The bank's fourth-quarter earnings announcement came in much the same way as the third quarter's did: just days after the bank got a black eye related to the mortgage business. On Monday, Wells Fargo and nine other banks agreed to pay a combined $8.5 billion to settle the government's allegations that they had wrongfully foreclosed on homeowners. In October, three days before third-quarter earnings, Wells Fargo found itself answering Justice Department accusations that it had misrepresented the quality of its mortgages. Wells Fargo denies the charges.
In some ways, the foreclosure settlement is a relief, because it removes one of the uncertainties hanging over the bank. It also means the bank no longer has to go through individual, independent reviews of its foreclosures as part of the settlement. Wells Fargo said that hiring consultants and extra staff for the foreclosure reviews had recently been costing it about $125 million a quarter.
But the settlement is also a reminder that more legal tangles and regulatory fines could be waiting for the banking industry. For some analysts, the unpredictability makes the industry's future earnings a wild card.
When Jefferies analyst Ken Usdin asked on a conference call how much more the bank might have to spend in buying back soured mortgages from investors, chief financial officer Tim Sloan replied: "The biggest mistake anybody in this industry can make is predict when that is going to end."
When Deutsche Bank analyst Matt O'Connor asked if there were "other skeletons in the closet" in the mortgage unit, Stumpf said he couldn't predict what might come up. But, he added: "I can tell you I am pleased that we are this far through the process and we have gotten a lot of big things behind us."
Revenue rose 7 percent, to $21.9 billion, beating the $21.3 billion expected by analysts polled by FactSet. Wells Fargo increased its business in credit cards, wealth management and other units, and charged more in fees.
The bank earned $4.9 billion before paying dividends on preferred stock, up 25 percent from $3.9 billion a year ago. That amounted to 91 cents per share, more than the 87 cents per share analysts were expecting, and up from 73 cents last year. Revenue and earnings were also up for the full year.
In recent years, JPMorgan Chase has usually been the first bank to report earnings, but Wells Fargo had been encroaching on that territory. In the past two quarters, Wells Fargo moved up earnings to release them on the same day as its rival. JPMorgan reports on Wednesday.