NEW YORK ( TheStreet) -- Wells Fargo ( WFC) got a positive review of its second-quarter results early Thursday as FBR Capital Markets raised its rating on the stock to outperform from market perform, citing "meaningful signs" of stabilization in the San Francisco-based bank's credit costs.

Wells' shares initially surged after its report on Wednesday, getting as high as $27.60 - a gain of 9% -- at one point, but the stock finished the session at $26.06, tacking on only 15 cents. Volume of more than 70 million was almost 50% above the issue's three-month trailing daily average of 47.3 million. Year-to-date, the stock was down 3.5% through Wednesday's close.

"2Q10 was a strong quarter, and credit stabilized more than we anticipated with NCOs net charge-offs down 16% or $841M to $4.5B, and NPAs non-performing assets up 5%, or $1.4B to $32.9B QOQ quarter-over-quarter , an improvement following the 14% increase in NPAs in the prior quarter," FBR said in a note to clients.

Beyond the trend in credit costs, which FBR expects to be a catalyst for future earnings through reserve releases, the firm attributed the upgrade to its belief that, relative to its peers, Wells is "sheltered" from many of the regulatory headwinds that will weigh on profits now that FinReg has passed.

FBR, which left intact a 12-month price target of $31 on the shares, also noted that Wells' shares are attractive on a valuation basis as the stock is trading at 1.7 times its tangible book value at quarter's end, and 9.7 times FBR's estimate for earnings of $2.70 a share in fiscal 2011. This compares to peers trading at an average of 12.5 times fiscal 2011 earnings estimates, FBR said.

"In our opinion, Wells Fargo is in a unique position as one of the four largest banks in the nation, but the least exposed to regulatory headwinds given the absence of sizable derivatives or trading platforms and very little credit card exposure relative to peers," the firm said.

As part of the call, FBR lifted operating earnings estimates for fiscal 2010 and 2011 to $2.20 a share and $2.70 a share from prior expectations of $1.95 and $2.30 respectively.

Wells' shares were higher in premarket action, last quoted up 1.8% at $26.53 on Nasdaq.com with volume running just shy of 80,000.

-- Written by Michael Baron in New York.
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