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Wells Fargo Gets a Housing Bump

The question for Wells Fargo and the overall banking sector headed into the third quarter was whether a housing pickup will be enough of offset negatives like falling interest rate-based earnings.

On the heels of the Federal Reserve's September plan to begin a third easing effort - known as QE3 -- by buying $40 billion in mortgage bonds a month for the foreseeable future and keeping interest rates near zero through mid-2015, followers of the banking sector warned that the program could be a big hit to 2013 bank sector earnings

In total, the bank's revenue rose 8.1% from a year earlier and held steady compared with the second quarter. Mortgage banking income rose to $2.81 billion, up 53% from 2011 levels, but posted a $86 million drop from the prior quarter

Better than expected earnings per share and revenue numbers in the third quarter signal that, for now, Wells Fargo continues to outperform expectations. However, headed into 2013, falling interest earnings are a worrying sign.

Deutsche Bank analyst Matt O'Connor downgraded Wells Fargo and PNC Financial (PNC), another fast growing lender, from 'Buy' to 'Hold' on concerns over year-to-date stock gains, interest rate pressures and whether the respective banks can maintain strong mortgage lending growth.

"We believe WFC is best positioned for mortgage activity remaining stronger than expected given its market share of about one-third... However, both of these are well known and we believe already reflected in the stock," writes O'Connor. The analyst recommends Goldman Sachs (GS) and Fifth Third Bank (FITB) as banks that may outperform in quarterly earnings.

Some questioned whether strong overall third quarter housing and loan origination data may outweigh concerns of an earnings stall at Wells Fargo or other lenders.

KBW analysts led by Fred Cannon expected Wells Fargo to report flat overall sequential EPS growth and a slowing of mortgage origination from the second quarter.

" Flat earnings in a difficult interest rate environment should be a good quarter for the company especially relative to other spread-dependent banks," wrote Cannon, who gives Wells Fargo shares an outperform rating. Overall, revenue at Wells Fargo held steady, while earnings per share rose by 6 cents.

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