Is Wells Fargo Still the Best Bank in the Business?

Wells Fargo (NYSE: WFC  ) will release its quarterly earnings report on Friday, and some investors are already concerned about the potential for a disappointment. With mortgage rates having risen sharply in recent weeks, the banking giant is facing a likely decline in refinancing activity, and a drop in new purchase mortgages could be right around the corner, choking off a vital source of earnings for Wells Fargo.

Still, Wells Fargo has put together a good track record of holding its own even in tough economic conditions. Shareholders seem optimistic as the stock has performed quite well lately. Let's take an early look at what's been happening with Wells Fargo over the past quarter and what we're likely to see in its quarterly report.

Stats on Wells Fargo

Analyst EPS Estimate

$0.92

Change From Year-Ago EPS

12%

Revenue Estimate

$21.20 billion

Change From Year-Ago Revenue

(0.4%)

Earnings Beats in Past 4 Quarters

4

Source: Yahoo! Finance.

Can Wells Fargo keep its earnings-beat streak alive?
Analysts have raised their views on Wells Fargo's earnings in recent months, kicking up their June-quarter estimates by a penny per share and raising their full-year 2013 consensus by more than a nickel per share. The stock has also performed admirably, with gains of about 15% since early April.

One big reason Wells Fargo's stock has done so well is that the bank has managed to keep its fundamentals strong. In April, the company reported record quarterly net income with total loan growth coming in at 4.2% because of increased activity in the commercial lending space. Deposits were also higher, and the bank has done a good job of keeping its capital ratios high in the face of Fed stress tests and regulatory scrutiny.

Still, flagging mortgage activity could prove to be problematic for Wells Fargo. Last quarter, mortgage originations fell by 16%, and the big rise in rates could push those levels downward even further. Yet Wells has a big advantage over Bank of America (NYSE: BAC  ) and JPMorgan Chase (NYSE: JPM  ) in that it has seen delinquency rates and foreclosure ratios that are much lower than those of its competitors. B of A's delinquency rate was about double that of Wells Fargo, and Wells came in more than 30% lower than JPMorgan's delinquency rate. Loan quality should be able to help Wells weather the mortgage storm better than its rivals.

Wells Fargo is arguably better prepared to handle changing conditions in the industry, which has also helped push its stock higher. For instance, it's better positioned against the rising tide of regulatory requirements than some of its banking peers, as evidenced by the recent move by the FDIC to raise capital-to-assets ratios from 3% to 5%. Wells comes in at an estimated 7.3% currently, with B of A next among the biggest banks at 5.1%. JPMorgan and Citigroup (NYSE: C  ) both weigh in at 4.5%, missing the new standard and necessitating further capital-raising moves. Moreover, while B of A, JPMorgan, and Citigroup have all suffered big losses in investment securities and other types of income, Wells Fargo has limited the damage by having a much smaller debt portfolio that wasn't as susceptible to rising interest rates.

When Wells Fargo reports earnings, take a close look at how the bank's management team addresses the big surge in mortgage rates recently. With revenue already slated to decline again this quarter, the loss of highly profitable mortgage activity could pose a long-term threat to earnings growth, one that the bank needs to address before it gets out of hand.

Learn more about Wells Fargo and the reason why it stands head and shoulders above its peers by reading our special report, "The Only Big Bank Built to Last." You'll find out why Warren Buffett loves the stock and much more about the banking giant. It's free, so click here to access it now.

Click here to add Wells Fargo to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.


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