Wells Fargo Takes a Breather

Wide-moat

Average deposits grew only 1% during the quarter, which is somewhat surprising given Wells' typical ability to gather low-cost deposits. Deposit costs also rose from both three months and a year ago; we attribute part of this to the Federal Reserve's interest rate increase in December, but we plan to compare deposit performance with peers more closely as more bank results are reported over the next week.

Falling long-term rates appeared to benefit the company's home lending group, with originations and applications up significantly as the spring selling season began. We think a combination of low rates, aging millennials, a favorable employment market, and more aggressive bank underwriting will result in good performance out of the mortgage business over the medium term, though peak volume achieved in the refinancing boom is unlikely to be matched.

Despite volatile market conditions in the first half of the year, Wells was able to offset lower asset-based fees and brokerage revenue with increased lending to customers, both jumbo mortgages and loans against securities portfolios. That said, equity fund outflows slightly outweighed other positive effects on total assets under management. We're concerned that competition and new regulation may hurt performance going forward.

Morningstar Premium Members gain exclusive access to our full analyst reports, including fair value estimates, bull and bear breakdowns, and risk analyses. Not a Premium Member? Get this and other reports immediately when you try Morningstar Premium free for 14 days.