Will Wells Fargo & Co. Earnings Keep Crushing Its Peers?

On Friday, Wells Fargo (WFC 2.74%) will release its quarterly report, and longtime shareholders have celebrated the bank's ability to weather the financial crisis and climb to new all-time record highs. Yet even as the West Coast bank has outperformed peers Bank of America (BAC 3.35%) and Citigroup (C 1.41%), some investors remain nervous about whether the banking industry on the whole will see so much new regulation that even Wells Fargo could have trouble sustaining its growth and holding onto its competitive advantage.

Throughout one of the toughest times in banking history, Wells Fargo has managed to execute on its strategic plan extremely well, emphasizing the core banking business over gimmicky tactics that got many of its banking peers in serious trouble. Because of its discipline, Wells Fargo didn't see nearly the damage from the housing bust that Bank of America, Citigroup, and other mortgage lenders suffered, and that put Wells Fargo in a strong position to climb during the recovery that followed the financial crisis. But as interest rates start to rise, is Wells Fargo prepared for another change in the banking environment? 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 report.

Stats on Wells Fargo

Source: Yahoo! Finance.

Can Wells Fargo earnings keep growing?
Analysts have stayed upbeat on Wells Fargo earnings in recent months, boosting their first-quarter estimates by a penny per share and their full-year 2014 and 2015 projections by $0.03 per share. The stock has performed well over a tough period for the market, rising 8% since early January.

Wells Fargo's fourth-quarter results continued an impressive streak of success for the bank, which recorded its 11th straight quarter of record earnings. Earnings per share rose 10% year over year, overcoming slight declines in net interest margins and returns on assets and equity. What was particularly impressive about the results was that they came even despite a drop by more than half in the volume of mortgage originations it did. Wells Fargo saw its community banking, wholesale banking, and wealth management areas all post rises in income compared to year-ago levels.

Wells Fargo got another vote of confidence when it passed the Federal Reserve's latest stress tests. The bank has done such a good job of building up capital reserves that it announced a massive share buyback program, getting Fed approval to spend $17 billion to repurchase 350 million shares. Shareholders will also get a dividend increase of 17%, with the new quarterly payout to amount to $0.35 per share.

One huge area in which Wells Fargo beats Bank of America, Citigroup, and its other peers is in attracting checking account and other demand deposits on which it doesn't have to pay interest. Although Bank of America has greater raw demand-deposit volume, Wells Fargo has a greater proportion of its deposits from non-interest-bearing sources, and that helps Wells Fargo maintain wider net interest margins that provide a substantial part of the bank's profits.

Still, one concern that investors have is that recently much of Wells Fargo's positive earnings have come from reductions in the amount of credit-loss reserve provisions it makes. Last year, those markdowns accounted for about $4.9 billion of Wells Fargo's net income, and the bank doesn't have much more room to cut those provisions to provide a boost to future earnings.

In the Wells Fargo earnings report, watch especially closely for numbers related to the mortgage industry. With the bank having the greatest mortgage-origination volume, what Wells says will have implications for Citigroup, Bank of America, and a host of other banks that have relied on mortgages for their income.

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