It's on a roll. Wells Fargo (NYSE: WFC ) was trading at $43.35 shortly before 11 a.m. EDT. Not only is this a 1.69% gain from Friday's close, but it also sets a new 52-week high for the bank. While Wells has been viewed as the stalwart financial stock for the past few years, there are myriad reasons this bank is headed higher than ever. Below are three of them.
1. Earning well
Of course last Friday's earnings report from Wells Fargo is the top reason that investors are excited to be involved with the bank. Not only did it report both top- and bottom-line figures that beat analyst estimates, the bottom line was yet another record for the bank. Despite this, fellow Fool John Maxfield noted that the Wells earnings report reveals a much more nuanced performance for the bank, with a decrease in loan-loss provisions really propelling higher revenue for the quarter.
Top executives at most of the Big Four banks were outspoken about the effect of rising rates prior to the earnings season open. Wells Fargo CEO John Stumpf and JPMorgan Chase (NYSE: JPM ) CEO Jamie Dimon were both quoted saying that new mortgage activity would likely decline because of the higher rates, but that eventually a normalized rate environment would be good for the banks overall. In the meantime, both have steered their respective insitutions though the volatile environment and presented record earnings.
The banks were under close watch this quarter, especially their mortgage-related operations, because of the ongoing Fed speculation and recent rise in interest rates. Wells reported higher rates of both new originations and applications in the second quarter despite the rise in rates, but it was careful to point out that the pipeline of new applications was smaller as June closed out than the bank reported at the end of March.
2. Contrary to popular belief
The most recent data shows a continued drop in application activity for the housing market as a whole, with new applications down 20% in the most recent four-week period. But the drop has really been driven by lower activity in the refinancing segment of the business, which had been booming until the rise in rates occurred. As Maxfield noted in another piece, an unexpected rise in new purchase-money mortgages despite rising interest rates was reported by both Wells and JPMorgan. The force behind the rise may be two-fold, with new buyers looking to lock in rates that are still historically low, and a new push from the banks to capture those opportunities after the refinance boom settled down.
Since we know the Fed will not be slowing its stimulus plan earlier than anticipated, and that it may be a while before the Fed Funds Rate moves higher, this market is rife with conditions that Wells Fargo can capitalize on as the biggest mortgage lender in the land.
3. Three-peat?
Friday was a great day for bank investors, with both Wells Fargo and JPMorgan reporting huge wins. This morning was a repeat of those results as Citigroup (NYSE: C ) beat analyst expectations thanks to trading gains and lower loan losses. With the momentum favoring the banking sector, it's no surprise that Wells investors would boost the bank today, but there may be more in store later this week as Bank of America (NYSE: BAC ) is set to report earnings on Wednesday.
If B of A announces similar earnings and mirrors the conditions reported by the other members of the Big Four, there will be a lot of confidence in the banking sector as a whole moving forward. The banks have been able to manage the challenges posed by the current economic conditions. And though no one knows exactly what will happen once the Fed begins tapering, the proof is already in the pudding that management within the Big Four is ready, willing, and able to negotiate through the new environment.
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