Wells Fargo determined to keep mortgage crown

Bloomberg

Wells Fargo & Co. isn’t giving up its mortgage-lending crown without a fight. The bank wants to hold on to its top spot as the whale of the $1.7 billion industry in the US, even as it predicts profit margins on making home loans will shrink this year and it faces pressure from rival Quicken Loans Inc.
“We want to be No. 1 regardless of who we’re competing with, because that’s the position we hold and we’re enthusiastic about it,” Chief Financial Officer John Shrewsberry said in an interview.
Wells Fargo and other large lenders have been slowly ceding share back to non-bank firms in the mortgage business since the time of the financial crisis, when banks dominated the market. Meantime, Quicken charged past almost every US mortgage provider — except Wells Fargo — by unfurling technology like its online Rocket Mortgage platform. In a December interview with Bloomberg News, Chairman Dan Gilbert said his company would soon overtake the leader.
“We’ll be the largest retail market share lender within a short period of time,” the billionaire said. Still, they’ve got a long way to go. Wells Fargo originated $107 billion of home loans through its retail channel in the year ended September 30, while Quicken’s total was about $88 billion, according to an investor document seen by Bloomberg News. Third-ranked JPMorgan Chase & Co. created $42 billion.
When you include mortgages done through correspondent lenders, the banks’ lead increases — Wells Fargo originated $231 billion in all, while JPMorgan’s total was $102 billion. Shrewsberry said that Quicken’s business is “disproportionately a refinancing business” compared with other lenders that have a large proportion of original mortgages, also known as purchase mortgages.
John Perich, a spokesman for Detroit, Michigan-based Quicken, declined to comment. Shrewsberry thinks an upcoming digital app for mortgages, expected to be introduced this quarter, will bring Wells Fargo some advantages over Quicken by making use of the bank’s existing customer data to pre-fill applications. “I’m anxious to see how many folks take advantage of that because it’s a real streamlining aggravation-preventer for our retail customer,” he said.
Yet profits could be hard to come by. Shrewsberry told analysts on a conference call for fourth-quarter earnings that the bank expects its profit margin on new mortgages to fall during the first quarter of 2018. The firm’s production margin for residential mortgage originations was 1.25 percent during the fourth quarter. Income from mortgage banking declined 35 percent compared with a year earlier, according to a statement.
Quicken generated an average gain-on-sale margin of about 4.1 percent, according to the investor document. Net revenue company-wide fell 5.1 percent during the first nine months of 2017 compared to the same period a year earlier, the document shows.
Wells Fargo has been struggling to cut costs and expects to close 250 of 5,900 branches this year as part of a plan reduce its network to 5,000 by the end of 2020. The company has also started selling units and pledged to slash expenses over the next two years, efforts that analysts expect will help bring its
expense ratio back in line with its long-term goal.
Wells Fargo has endured a rash of consumer scandals since regulators fined the bank in September 2016 for opening millions of potentially unauthorized customer accounts. Fresh issues arose last year over insurance forced on auto-loan customers and fees incorrectly assessed to customers looking for mortgage loans.
The fake accounts were again a flash point in August, when it revised the number of customers
potentially harmed to 3.5 million.
“I’d love to live in a world where I can give you an absolute guarantee and certainly, but it’s just not the world we live in,” Chief Executive Officer Tim Sloan told analysts in response to questions about whether the firm has rooted out other potential scandals. “I just can’t provide you with that absolute guarantee at this moment.” The consumer woes have led to higher costs and a deterioration of the bank’s efficiency ratio, a key measure of profitability. Sloan distanced the company from its historical goal of 55 percent to 59 percent in May, setting a new target of 60 percent to 61 percent, excluding litigation costs.
The CEO called Wells Fargo’s 62.7 percent reading from the first quarter “completely unacceptable.” The ratio was 76.2 percent in the fourth quarter compared to 65.5 percent in the third quarter. Without the litigation charge, the fourth quarter ratio would be 61.5 percent.
“We’ve got to improve the efficiency of this company,” Sloan told analysts on the call. He said the company expects to improve the ratio into the 59 percent range by year-end, with an ultimate goal of returning to between 55 percent and 59 percent.
The lender had positive news on the tax front, as expected. As one of the few large banks with deferred tax liabilities rather than assets, Wells Fargo said it booked a $3.35 billion benefit stemming from changes to tax policy.
Its effective tax rate in 2018 will probably be about 19 percent, compared with more than 31 percent in both 2016 and 2015, the bank said.