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Wells Fargo Earnings: An Early Look

By Dan Caplinger - Apr 9, 2013 at 9:41AM

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How will the big bank handle a potential slowdown in mortgage lending?

Earnings season has begun, and on Friday, Wells Fargo (WFC 1.92%) will release its latest quarterly results. The key to making smart investment decisions on stocks reporting earnings is to anticipate how they'll do before they announce results, leaving you fully prepared to respond quickly to whatever inevitable surprises arise. That way, you'll be less likely to make an uninformed, kneejerk reaction that turns out to be exactly the wrong response to the news.

Even in the much-maligned banking sector, Wells Fargo has a strong reputation for having minimized its own damage from the mortgage meltdown, inheriting most of its problems when it bought out Wachovia during the financial crisis in 2008. Since then, the bank has worked hard to resolve those problems. 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

$0.88

Change From Year-Ago EPS

17%

Revenue Estimate

$21.6 billion

Change From Year-Ago Revenue

(0.2%)

Earnings Beats in Past 4 Quarters

4

Source: Yahoo! Finance.

Can Wells Fargo prove analysts wrong again this quarter?
In recent months, analysts have gotten more optimistic about Wells Fargo's earnings prospects, upgrading their earnings estimates for the just-ended quarter by a penny per share and adding $0.03 to their EPS calls for full-year 2013. The stock has performed reasonably well, rising about 6% since early January.

Wells Fargo has a strong reputation among big banks for its relatively drama-free performance. With its status as the No. 4 bank in the country by assets and carrying the seal of approval from Warren Buffett, Wells has treated shareholders well lately, providing good returns and boosting its dividend earlier this year. Moreover, after passing the Fed's stress tests last month, a further 20% increase in its payout appears imminent

But one big challenge that Wells Fargo will start to face this quarter is in mortgage lending. Although the fact that housing prices have apparently hit bottom is an encouraging sign, slight rises in interest rates could put a halt to refinancing activity. That in turn will force banks to seek more of the transaction-based revenue that has helped them recover so strongly, and they'll need to get it from new homebuyers rather than existing homeowners seeking lower mortgage rates from new loans. Although JPMorgan Chase (JPM 0.70%) has also been a big player in the mortgage market, Wells outpaced JPMorgan's home-loan volume by nearly 150% in the fourth quarter of 2012, showing the extent of Wells Fargo's reliance on the segment for its overall profits.

Another concern is the return of subprime lending, this time in the auto-loan market. Both Wells Fargo and Bank of America (BAC 0.53%) have made it easier for customers to get auto loans, although they've largely stayed in the prime market. But by helping to back subprime lender Exeter Finance, Wells Fargo has at least some risk from the lower end of the credit tier.

In its quarterly report, Wells Fargo will likely move forward with its decision on its dividend, and should provide more color on how it plans to handle a less generous interest rate environment going forward. With solid management on board, Wells Fargo should be able to chart a course forward that will preserve its profitability and battle-tested financial strength. 

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Stocks Mentioned

Wells Fargo & Company Stock Quote
Wells Fargo & Company
WFC
$44.12 (1.92%) $0.83
Bank of America Corporation Stock Quote
Bank of America Corporation
BAC
$35.84 (0.53%) $0.19
JPMorgan Chase & Co. Stock Quote
JPMorgan Chase & Co.
JPM
$127.24 (0.70%) $0.88

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