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Wells Fargo Earnings: Rising Profits, Rising Pressure (Update 2)

Wells Fargo also will have less room to grow earnings from one-off items such as reserve releases and falling net-charge-offs, given near-record low levels reported on Friday.

Improvements to Wells Fargo's balance sheet, however, may have run their course in providing savings to bottom-line earnings.

Net charge-offs of $1.4 billion represented about a 40% drop from year-ago levels as the rate fell to a post-crisis low of 0.72%. The bank released $200 million in reserves and reported non-performing assets of $22.9 billion, an over 13% drop from the first quarter of 2012.

Still, an efficiency ratio of 58.3%, at the high end of recent projections, indicates one area of the bank's bottom line that could improve significantly in coming quarters.

A 14th straight quarter of earnings growth will hinge on fundamental improvements across Wells Fargo's businesses that could finally dispel prominent concerns among investors, even if the bank's performance remains among the best in the U.S. financial sector.

"Quarterly earnings and EPS increased at double-digit rates compared with first quarter 2012, while loans and deposits demonstrated continued growth in a challenging economic environment. In addition, expenses continued to decline as we improved efficiency across the franchise, and returns on assets and equity increased and remained among the highest in our industry," John Stumpf, Wells Fargo chief executive said in a statement.

As a ballast in the global financial sector, Wells Fargo's interest margins are also being pressured by continued deposit growth as savers seek only the strongest banks. Total core deposits of $926 billion reflected a $55.4 billion inflow of depositor money in the quarter.

In that sense, Wells Fargo has suffered from its own success over the past two quarters.

On an earnings conference call, Wells Fargo highlighted consistent market share gains in deposits and mortgage originations as an obvious positive. The bank expects to cross-sell a bevy of financial products to incoming customers, creating new growth prospects.

With market share gains across mortgages, deposits and some capital market activities, there is a real prospect for pressures that cast a pall over Wells Fargo's 13th quarter of earnings growth on Friday to turn to a benefit in coming quarters.

"While the quality of the beat will be contested, we believe estimates should hold up given that credit is already much better than our existing model," Ken Usdin, a Jefferies analyst wrote in reaction to Friday's earnings announcement.

For more on Wells Fargo's earnings expectations, see why a streak of rising earnings poses a hidden opportunity for investors.

Also see why Moody's says Wells Fargo's burgeoning buyout business is a risk to the bank's sterling credit rating.

Buffett Buyback Math Key to Post Stress Test Bank Earnings

-- Written by Antoine Gara in New York
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