(Bloomberg) -- Wells Fargo & Co., the most valuable U.S. bank and largest home lender, reported a 17% rise in second-quarter profit on strength in mortgage banking and a drop in expenses.

Net income advanced to a record $4.62 billion, or 82 cents a share, from $3.95 billion, or 70 cents, a year earlier, the San Francisco-based company said today in a statement. The average estimate of 31 analysts surveyed by Bloomberg, excluding some special items, was 81 cents a share.

Chief Executive Officer John Stumpf, 58, countered record- low interest rates and narrower margins with more home lending and purchases of loan portfolios from European banks. Wells Fargo creates a third of all new U.S. mortgages and said today that new applications set a quarterly record. The firm also plans to shave as much as $1.5 billion off quarterly costs by the end of 2012.

“On the mortgage front, Wells has built a massive lead in the origination business,” Kenneth Usdin, a Jefferies Group Inc. analyst, wrote in a July 9 report that assigned a buy rating and a $39 price target.

Revenue increased 4% to $21.3 billion from a year earlier, while slipping 1.6% from the first quarter. The net interest margin didn’t improve from the first three months of this year, holding steady at 3.91%.

Results were aided by a $400 million release of loan-loss reserves, according to the statement. Income before taxes and provisions, a measure that filters out the effect of one-time items, advanced 12% from a year earlier and almost 3 percent from the first quarter, according to the statement.

Credit performance improved, Chief Risk Officer Mike Loughlin said in the statement. “We expect continued but more modest improvement for the remainder of the year, and we continue to expect future reserve releases in 2012,” he said.

Mortgage banking income climbed to $2.89 billion, a 79% increase from last year’s second quarter and up $23 million from the first quarter, according to the company.

Europe’s Distress

Nationwide home loan originations in the U.S. probably climbed 28% in the second quarter from a year earlier to $372 billion, according to estimates from the Washington-based Mortgage Bankers Association. About three-fourths of those were refinancings, the MBA estimates.

Wells Fargo has been among the most active U.S. banks buying loan portfolios and businesses from troubled European lenders. The company agreed to purchase German lender WestLB AG’s subscription-financing business and about $3 billion in outstanding loans, according to a June 25 statement.

Banks are searching for revenue growth as record low interest rates cut into margins and an unemployment rate above 8% puts a damper on new credit. The U.S. Treasury 10-year note yielded 1.44 percent intraday on June 1, the lowest on record, according to data compiled by Bloomberg.

“Low interest rates continue to be one of the biggest fundamental headwinds facing banks today,” FBR Capital Markets Corp. analysts led by Paul Miller wrote in a July 9 report.

Commercial Loans

Net interest margins, the difference between what banks make on loans and pay for funds, have been squeezed by falling rates and slack demand among borrowers. The 25 largest U.S. commercial banks held $4.09 trillion in loans and leases on June 27, a 0.6% gain over March, according to the Federal Reserve.

Mortgage banking and commercial and industrial lending have shown strength. So-called C&I loans at the 25 largest lenders climbed 3.7% over the first quarter to $772.2 billion in the week ended June 27, according the Fed.

“We like WFC as best in breed,” Miller wrote, referring to the company by its stock ticker. Firms with strong mortgage- banking income will outperform competitors this quarter, Miller wrote.

Wells Fargo does relatively little business in Europe compared with larger peers such as JPMorgan Chase & Co., the biggest U.S. bank by assets, and Citigroup Inc., ranked third.