Wells Fargo & Co (NYSE:WFC)’s most recent quarter was not a smash hit in terms of revenue. However, the company was able to improve the overall efficiency of its operations. Wells Fargo & Co (NYSE:WFC) saw reasonable improvements in its total profitability by refocusing its product portfolio from revenue generating activities to profit generating activities. The company has been really focused on cross-selling financial products.
Wells Fargo & Co (NYSE:WFC) has been able to improve its cross-sell from 5.98 to 6.10. Cross-selling basically involves selling pre-existing customers into other financial products that the bank offers. Improving cross-sell improves the overall profitability and revenue of the bank. Cross-selling has seen grown from 6.05 in 4Q 2012 to 6.10 in Q1 2013.
Wells Fargo isn’t the only bank relying upon cross-selling
Bank of America Corp (NYSE:BAC), and JPMorgan Chase & Co. (NYSE:JPM) have been really active in trying to sell financial products outside of lending. As a result, Bank of America Corp (NYSE:BAC) and JPMorgan Chase & Co. (NYSE:JPM) have been able to improve profitability.
Bank of America Corp (NYSE:BAC) was able to improve its profitability quarter-over-quarter from 2.76% to 4.68% due to cross-selling, along with a host of other reasons. While cross-selling isn’t the only factor that is contributing to Bank of America Corp (NYSE:BAC)’s success, it is at least improving profitability, and better maximizing the amount of revenue it generates from its pre-existing business activities.
JPMorgan also hopes to improve its profitability by investing heavily in customer service initiatives. It has been able to improve profit margins from 18.37% in 4Q 2012 to 20.08% in 1Q2013. JPMorgan Chase & Co. (NYSE:JPM) already operates a heavily diversified portfolio of financial products.
Wells Fargo generates half of its revenue from fees, and it is likely that Wells Fargo & Co (NYSE:WFC) can further maximize profits through further increases in its cross-sells. In fact, every universal bank is aggressively expanding its product portfolios in order to maximize cross-selling opportunities.
The macro-economic environment has seen some reasonable improvement. The U.S. total debt has stabilized, and may have bottomed. Overall economic sentiment has been improving. The unemployment rate has been on a continuous decline, which may imply further demand for debt in future years. Currently, the unemployment rate is 7.60%.
The improving economy will certainly help Wells Fargo going forward
Wells Fargo was able to improve its net income to $5.171 billion in Q1 2013 from $4.248 billion in Q1 2012. The improving net income is attributable to falling legal expenses, along with declining loan loss allowances.
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.
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