Wells Fargo: The Street-Beating Machine

Wells Fargo may be the last big money-center bank to report first-quarter results, but it's unlikely to be the least when it comes to beating Wall Street views.
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SAN FRANCISCO (TheStreet) -- Wells Fargo (WFC) - Get Report may be the last big money-center bank to report first-quarter results, but it's unlikely to be the least, when it comes to beating Wall Street expectations.

The company is set to release its latest numbers before the opening bell on Wednesday. Wells Fargo has gained a reputation for reporting blockbuster earnings, ever since it stunned the market a year ago by pre-reporting a

rockstar profit of $3 billion, just after stocks had reached rock-bottom in March 2009.

Wells' report helped kick off the ensuing stock-market rally, and the bank has consistently beaten expectations for seven of the past eight quarters. The sole exception was the fourth quarter of 2008, when Wells took massive write-downs on Wachovia's toxic loan portfolio -- preparing for the worst when closing its acquisition. But in fact those write-downs, along with the initial burst of the refinancing wave,

helped set up Wells' profit surprise a year ago.

Since mid-2009, analysts have boosted their view of Wells' earnings capacity, according to

Thomson Reuters

. The bank's actual results topped the average expectation by 23 cents per share for the second quarter of 2009, then by 19 cents per share in the third quarter, and 9 cents per share in the fourth.

Results

:

For the latest quarter, the Street expects the firm to report a profit of 42 cents per share on revenue of $21.7 billion, on average. Of 26 analysts who cover the firm, the most bullish expects Wells to earn 51 cents per share and the most bearish expects 28 cents per share.

Though Wells continues to handle the burden of Wachovia's bad debt, there's

far less worry about Wells'

credit metrics than there had been for the past several quarters. In the past two weeks, the other three major money-center banks --

JPMorgan Chase

(JPM) - Get Report

,

Bank of America

(BAC) - Get Report

and

Citigroup

(C) - Get Report

-- each reported improving or stabilizing credit trends and better-than-expected profits due largely to non-consumer businesses.

Collins Stewart analyst Todd Hagerman, who upgraded the stock to buy earlier this month, notes that Wells management anticipates consumer credit will reach an inflection point in the second quarter of 2010. Even before the rest of the money-center banks reported their results, he was expecting the company to best "conservative" expectations for its credit costs.

As a reference point, net charge-offs totaled $5.4 billion for Wells in the fourth quarter, or 2.71% of the company's annualized loan book, an increase from $5.1 billion in the third quarter, or 2.5% of annualized loans.

Stock Performance:

But the market may be too queasy about the

Goldman Sachs

(GS) - Get Report

fraud charges and a regulatory reform bill to fuel a further rally in Wells Fargo stock, which is up 22% so far this year, as of Monday's close at $33.02. It has increased by a factor of 4.2 since hitting a low of $7.80 in March 2009.

Nonetheless, Collins Stewart's Hagerman called it one of the "cheapest big banks," trading at a multiple of 9 times normalized earnings in his upgrade. Deutsche Bank's Matt O'Connor also labeled Wells' stock his "top pick," with a "very attractive" valuation, given economic improvements and Wells' strong mortgage business and exposure to a steep yield curve.

Yet that was before the

Securities and Exchange Commission

outlined civil fraud charges against Goldman Sachs on on Friday, leading to a temporary sell-off, and more circumspect attitude of whether to buy, hold or sell. Analysts have largely remained bullish on bank stocks - including Goldman, which also reported a stellar quarter on Tuesday - but investors must weigh improvements to the industry's core businesses against the potential of regulatory curbs, reputational damage and investor litigation.

Wells, however, may have little exposure to the issues plaguing Goldman & Company. The SEC is examining banks' practices during the height of the subprime bubble, when the industry was creating

hundreds of billions of dollars' worth of exotic vehicles for investors to place bets on the direction of the housing market. Although Wells and

Wachovia were certainly involved in

some such transactions, neither was a major player in the structured investment vehicle space. Wells also made great strides during 2009 to wind down the riskiest of Wachovia's SIVs.

Wildcard:

When it comes to broader reform, though, any large money-center bears some risk. Rules proposed by Congress would raise the cost of doing business, and limit practices that have helped drive industry profits during the pre-crisis decade. Although some parts won't hurt Wells Fargo and CEO John Stumpf (pictured above) too much -- like the credit-card reform bill and Regulation E, which clamped down on overdraft practices -- it will be affected by broader changes.

For instance, as an official "Too Big To Fail" entity, Wells may have to pay into a resolution fund to insure the industry's survival. And while it may not have structured

Abacus-like deals the way Goldman did, Wells Fargo will certainly be impacted by

broader measures to oversee the derivatives market. As lending has contracted, Wells has used

savvy interest-rate bets to bolster the bottom line -- bets which may be forced through a clearinghouse, and become more costly to perform.

That's not to say that Wells will be crippled by reform, or get hit harder than others, but it does stand to be impacted. And when the bank reports first-quarter results tomorrow - even if it blows away estimates once again - investors will want to hear more about Wells' exposure to uncertain factors than its proven ability to outperform the competition.

-- Written by Lauren Tara LaCapra in New York

.