3 Must-Watch Things in the Wells Fargo Earnings Report

Wells Fargo (WFC 0.60%) leads the charge in many people's minds as the top bank in America. So it is seems fitting that it will be the first of the major banks to announce third-quarter earnings. Here are three things to keep an eye on when it reports next week.

1. Wholesale banking business growth
Wells Fargo has three distinct business lines: community banking, wholesale banking, and wealth, brokerage and retirement. The wholesale banking business is Wells' corporate financial arm that provides banking services and solutions to businesses with more than $20 million in sales.

As of last quarter, wholesale banking represented about 35% of Wells' total income. Yet somewhat troublingly, in the second quarter its net income only went up 7% compared to the prior year. On the other hand, Wells' other businesses saw their income skyrocket:

However, it must be noted here that the 7% growth isn't totally cause for bad news, as Bank of America's (BAC 1.33%) comparable global banking business' net income actually fell by about 2% last quarter. As business conditions improve throughout the U.S., it should be distinctly translated to Wells Fargo's bottom line Wholesale banking results, so check to see if that trend is true.

2. Mortgage trends
There have been countless headlines detailing the dramatic slowdown in the mortgage market as rates rise and the demand for refinancing slows to a steady crawl. In fact, Wells Fargo, Citigroup (C 1.85%), and Bank of America have all announced major layoffs in response to this trend. Wells Fargo is one of the biggest mortgage originators in the U.S. and while it has been one of the biggest benefactors of the huge demand for refinancings, it could face the sharpest hit as these dry up.

Yet Wells has been on top of the trend and is seemingly making the right moves by consolidating certain parts of this business in response to lower demand. Wells Fargo has been proactive in the past to trends like this, and despite falling revenue, it has done a great job of controlling expenses in its community banking business where mortgages are accounted for.

While there will almost undoubtedly be a fall in total mortgage originations, keep an eye on the bank's profit margin, which stood at 25% last quarter.

3. Continued improvement in key metrics
Despite falling net interest margins, last quarter Wells Fargo saw its essential profit metrics of return on assets and return on equity each jump. Its efficiency ratio, which measures the cost it takes to bring in each dollar of revenue, fell both quarter over quarter and year over year.

Yet while all of this is great, it still trails equally esteemed peer U.S. Bancorp (USB -0.04%) on all three of those metrics, despite its higher net interest margin as shown in the table below:

To Wells Fargo's credit, it has been steadily improving those metrics and narrowing the gap between it and U.S. Bancorp. See if that trend continues, because currently Wells Fargo's price to tangible book value multiple would have to grow by 50% to match U.S. Bancorp's, which could mean there is a still a lot of room for growth at this banking powerhouse.