Cost-cutting initiatives may have also boosted earnings. The company has shifted its focus from lending to offering financial services which generate fee income. Fee income has higher profit margins with lower contribution towards revenue. The net interest margin was 3.48% in the quarter, a decline from 3.91% in Q1 2012.
The decline in net interest margin was primarily attributable to the increase in the Tier 1 common equity ratios. The Tier 1 common equity increased from 9.98% to 10.38%, which is well above the 9.50% requirement imposed by the Financial Stability Board.
Wells Fargo & Co (NYSE:WFC) was able to improve its profitability 22% over Q1 2012. Despite the amazing earnings, revenue declined 3%. The decline in revenue is attributable to lower lending along with higher capital ratios on Wells Fargo’s balance sheet. It is likely that Wells Fargo will be able to derive further efficiencies from operations in future fiscal years.
The company’s revenue growth will stabilize. Analysts, on a consensus basis, predict revenue growth of 1.10% for fiscal year 2014. The economy is recovering, and with the housing market starting to stabilize (housing starts are trending higher), demand for loans are also likely to trend higher.
American’s feel wealthier, credit is expanding, with consumer confidence and spending at all time highs. Wells Fargo & Co (NYSE:WFC) is well-positioned in this macro environment.
The article Why This Bank Is a Smash Hit originally appeared on Fool.com and is written by Alexander Cho.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.