Earnings Preview: Large Mortgage Lender Wells Fargo Getting Big Boost From Housing Recovery

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By Eleazar David Meléndez | October 12, 2012 1:16 AM EST

When Wells Fargo and Co. (NYSE:WFC) becomes the second large financial to report on its quarterly earnings Friday morning, Wall Street stock pickers are hoping a strong earnings report from the bank can help start off what is expected to be a dreadful earnings season with somewhat of an upbeat note.

Bank analysts expect San Francisco-based Wells Fargo -- the nation’s largest mortgage lender -- to report a significant improvement on its results from a year ago, as a spike in revenue from lending activity is seen to offset the decreased profitability each individual loan can provide the financier given the long-term zero-interest-rate environment.

Analysts surveyed by Reuters see Wells Fargo reporting net income of $4.62 billion, or 87 cents per share, on revenues of $21.47 billion. That would be a jump of 21.5 percent on profit and 9.4 percent on revenue from languid results a year ago.

"A better housing market would help banks on the revenue and expense side of the equation, translating into fewer charge-offs, lower credit expenses (and) better revenue as residential loan growth picks up," analysts at Goldman Sachs said this week in a note that referred to Wells Fargo and several other banks as likely to show big bottom line improvements even on modest upticks in this area of the economy.

Indeed, it will not only be market analysts but also economic policy makers who will be looking at Wells Fargo’s result Friday to gauge the level of recovery in the housing market. Optimism is high: Shares of Wells Fargo were trading in a range close to four-year highs Thursday, in spite of having taken a hit earlier in the week after a federal lawsuit against the bank was revealed.

Not that there aren’t pitfalls. In early September, Chief Financial Officer Timothy Sloan told investors at a conference that its profit margin from lending and investing could fall 17 basis points in the third quarter, as the compression in loan profitability within a low interest-rate environment became more evident.

There’s also a substantial risk the bank will have to note one-time charge-offs relating to legal issues. On Tuesday, the U.S. attorney announced it was filing a lawsuit against the bank for “reckless” activities in its mortgage-securitization unit that led to big losses in government-insured loan books.  That follows a July settlement, for $175 million, over allegations of discrimination in lending.

Still, the expectation is higher revenues will carry the day. Analysts at Credit Suisse, who have a Neutral rating on Wells Fargo but recently gave a positive nod to the bank stock, say Wells Fargo is one of the issues they expect will "surprise on the upside."

Shares of Wells Fargo and Company were trading at $35.43, up 20 cents or 0.57 percent, from the previous day’s close, during early-morning action on the New York Stock Exchange.

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