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Wells Fargo Earnings Growth 'Set to Stall': Analyst

NEW YORK ( TheStreet) --- A slew of analysts on Monday raised price targets and earnings estimates for Wells Fargo (WFC - Get Report), but Atlantic Equities analyst Richard Staite sees "the shares trading broadly sideways over the coming year."

Saite in a note to clients on Monday reiterated his neutral rating on Wells Fargo, with a price target of $37, and said "with profitability already very high it is becoming increasingly difficult for the bank to show further improvement."

There's no question that Wells Fargo had an excellent first quarter, reporting a record profit of $5.2 billion, or 92 cents a share, compared to 91 cents the previous quarter and 75 cents a year earlier.

Heading into earnings season, all of the big banks were expected to show significant declines in mortgage revenue, because of a slowdown in home refinancing activity and because a rise in long-term interest rates had caused profit margins on the sale of newly originated loans to decline.

Wells Fargo's first-quarter mortgage revenue totaled $2.8 billion, declining from $3.1 billion in the fourth quarter, and from $2.9 billion in the first quarter of 2012. First-quarter mortgage loan originations declined to $109 billion from $125 billion the previous quarter. Net gains on mortgage loan origination and sales totaled $2.5 billion in the first quarter, declining from $2.8 billion in the fourth quarter and from $2.6 billion in the first quarter of 2012.

Declines in credit costs and other expenses more than offset the company's mortgage revenue decline. Noninterest expense declined to $12.4 billion in the first quarter from $12.9 billion the previous quarter and $13.0 billion a year earlier. The company said the sequential improvement was "primarily due to lower operating losses associated with the Independent Foreclosure Review settlement and a $250 million charitable contribution to the Wells Fargo Foundation in the fourth quarter."

Mortgage Gain on Sale margin

Wells Fargo's gain on sale margin for mortgage loans sold during the first quarter was 2.56%, which matched the record margin for the fourth quarter. But this is a delayed indicator for the company, as it recognizes loan sales when they actually occur, rather than when the new mortgage loan has its rate "locked," as most other large banks do.

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