Wells Fargo Bulls Corralled By Credit Risks

(Updated with stock price move.)

SAN FRANCISCO (TheStreet) -- Once again, Wells Fargo (WFC) investors are split on whether the firm's climbing credit costs will overtake its undeniable earnings power.

Ultimately, the question comes down to whether the San Francisco-based bank is worth the hefty premium at which its shares trade, relative to other large-cap banking peers.

Throughout the crisis, Wells management has followed through with every promise made. They wrote down Wachovia assets so conservatively at the time of acquisition that the bad loans were actually written up in the first quarter, and are now performing better than expected.

When the Federal Reserve told the bank it would need to raise $13.7 billion, they insisted there was no need to dilute shareholders beyond the $8.6 billion raised in an oversubscribed common stock offering; Wells would earn its way out of the downturn instead. So far, the bank has surpassed Fed estimates of its earnings power to generate $20 billion in capital, with pre-tax, pre-provision earnings exceeding regulatory estimates by 35%, as well as its own estimates.

But Wall Street's doubting Thomases will not relent. Though Wells has earned $9.5 billion, or $1.69 per share, this year - beating JPMorgan Chase's (JPM) $8.5 billion, Goldman Sachs' (GS) $8.4 billion, Bank of America's (BAC) $6.5 billion, Citigroup's (C) $6 billion, and Morgan Stanley's (MS) $636 million - pessimists continue to cast aspersions after every bottom-line busting quarter.

"While the combined company's profitability suggests [Wells] has the flexibility to earn through the credit cycle, the company's premium valuation, thin core capital, and credit volatility keep us on the sidelines," Collins Stewart analyst Todd Hagerman said in a report Thursday morning.