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Wells Fargo Could Hit Earnings Cliff Soon: Analyst

NEW YORK ( TheStreet) -- Wells Fargo (WFC - Get Report) has posted 15 consecutive quarters of earnings growth, a winning streak that has to come to an end, according to Oppenheimer analyst Chris Kotowski.

The San Francisco-based lender reported better-than-expected earnings of $5.6 billion on revenue of $20.5 billion. Bottom-line earnings beat estimates of $5.26 billion but revenue fell short of estimates by $500 million, according to Bloomberg data.

The bank's performance is also impressive considering that rival JPMorgan Chase (JPM - Get Report) reported a loss, following a large addition to legal loss reserves.

Still, Kotowski said in a Oct. 11 report that "investors should be prepared for a time when the continual upward progression of EPS just can't be maintained."

Mortgage revenue took a deep hit in the latest quarter, as expected, with rising interest rates causing a plunge in refinancing volumes. The volatility in revenue should be mitigated by the bank's plans to lay off 5,300 employees. Kotowski is no fan of the mortgage business, with its inherent volatility and low profitability. "There is a reason why the thrifts that used to own this business traded at 5X," he noted.

The analyst also noted that the last two quarters have benefited significantly from reserve releases due to improving credit quality. Outside of credit quality improvements there wasn't much to cheer about the report, with loan growth being flat, mortgages way down and trust and investment fees which had held up in the prior quarter also weakening slightly.

"Unless we see some significant organic loan growth soon, [Wells Fargo] looks as if it will hit a bit of an earnings cliff soon," wrote Kotowski.

The analyst is also concerned that the share count has increased by 26 million at Wells Fargo, despite the fact that the bank has bought back 136 million shares over the past year. "We think a declining share count is important in a slow growth environment," the analyst said.

Kotowski acknowledged that Wells Fargo is still a very profitable, "high-quality" company that is reasonably valued, even when reserve releases are excluded from "core" EPS.

But he believes JPMorgan and Citigroup (C - Get Report) may offer better value for the time being.
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