For now, investors are yet to realize those expectations, given weak macro-economic data in the U.S., particularly the second half of 2013.
"We are kind of in a boring growth period," Mosby, the Guggenheim Securities analyst said. Still, current economic trends do reflect continued recovery from the Great Recession, a scenario that augurs well for Wells Fargo's overall credit fundamentals.
Eventually, large cap banks will need a better economic backdrop to justify rising valuations across the sector. Some analysts are beginning to question whether a weak post-crisis recovery will strengthen anytime soon.
Speaking about a multi-year recovery in banking sector bellwethers such as Wells Fargo, Christopher Mutascio, an analyst with Keefe, Bruyette & Woods wrote that "it feels like the historical progression of catalysts for the banks of 1) improving credit quality giving way to increased loan growth and then 2) an improving economy resulting in higher short-term rates and NIM expansion has broken down -- at least for the time being."Mutascio expects Wells Fargo to beat consensus this quarter and report $1 a share in third quarter EPS. Still the analyst also expects poor overall operating trends. "While our EPS estimate is higher than consensus, we think the company's core operating EPS could come in weaker than its reported EPS as the company pulls some levers to offset weak core mortgage banking results," Mutascio wrote in an October earnings preview. Wells Fargo could use $20 billion in securities purchases to drive higher net interest income, while reporting improved mortgage servicing income and lower operating expenses. "[If] significant loan loss reserve releases are needed to offset the decrease in mortgage production income, then the reaction may not be as positive as investors may view such an offset as only temporary," the analyst wrote. An earnings miss could represent an opportunity for investors who are confident in Wells Fargo's overall position. It could also present an opportunity for those who haven't lost their confidence in wider U.S. economic fundamentals. "Unfortunately, it seems to us that the fate of the bank stocks (in terms of positive catalysts) is now tied directly to the macro-economic environment. A breakout of the GDP malaise could allow for further multiple expansion and outperformance. Conversely, it is hard for us to envision further outperformance at these levels if economic growth remains sluggish," Mutascio wrote. In the wake of Wells Fargo's second-quarter earnings, TheStreet highlighted the importance of economic conditions to the bank's earnings outlook. Those trends haven't and aren't expected to improve in the second half of 2013. Nevertheless, few investors are likely to take Wells Fargo's third-quarter earnings results as a reason to change their outlook on the bank's shares. Wells Fargo remains well positioned for durable growth. The question is when that will come. -- Written by Antoine Gara in New York Follow @antoinegara
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