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We expect Wells Fargo & Company (WFC - Analyst Report) to beat earnings expectations when it reports second-quarter 2013 results before the opening bell tomorrow, Jul 12, 2013.

Why a Likely Positive Surprise?

Our proven model shows that Wells Fargo has the right combination of two key ingredients to beat earnings.

Positive Zacks ESP: The earnings ESP (Read: Zacks Earnings ESP: A Better Method) for Wells Fargo is +1.09% – the difference between the Most Accurate Estimate of 93 cents and the Zacks Consensus Estimate of 92 cents. This indicates a likely positive earnings surprise.
 
Zacks Rank #3 (Hold): Wells Fargo’s Zacks Rank #3 increases the predictive power of its ESP. The combination of its Zacks Rank and Earnings ESP makes us confident of a positive earnings surprise in the to-be-reported quarter.

Note that stocks with Zacks Ranks #1, #2 and #3 have a significantly higher chance of beating earnings. The Sell rated stocks (#4 and #5) should never be considered going into an earnings announcement.   

Drivers of Better-than-Expected Earnings

As capital market activity remained strong during the April-June period with continued support from the Fed, the propensity to invest in the market increased. Given the prevailing low interest-rate environment, there was a surge in demand for financial instruments that are not interest rate sensitive and offer better returns. As a result, non-interest revenue sources, primarily trading revenue, should provide strong support to the top line this quarter.

Though sluggish loan growth will keep interest income under pressure and increased litigations will raise total expenses, an uptick in mortgage activity and lesser credit loss provisions are expected to support bottom-line improvement in the to-be-reported quarter.

Moreover, rising home prices and falling unemployment have increased lending through credit cards. As a result, it is anticipated that the company will report better results in its credit card business.

Activities of Wells Fargo during the second quarter of the year were inadequate to win analysts’ confidence. The Zacks Consensus Estimate for the second quarter remained stable at 92 cents per share over the last 7 days.
 
Other Stocks to Consider

Wells Fargo is not the only bank looking up this earnings season. Here are some other banks you may want to consider as our model shows these have the right combination of elements to post an earnings beat this season:

JPMorgan Chase & Co. (JPM - Analyst Report) has an earnings ESP of +2.11% and carries a Zacks Rank #2 (Buy). Its second quarter release is scheduled on the same day as Wells Fargo.

The earnings ESP for Citigroup, Inc. (C - Analyst Report) is +0.86% and it carries a Zacks Rank #3. The company is scheduled to release its second-quarter results on Jul 15.

BB&T Corporation (BBT - Analyst Report) has an earnings ESP of +1.37% and carries a Zacks Rank #3. It is scheduled to report its second-quarter results on Jul 18.

Wells Fargo and JPMorgan, with exposure in almost all banking businesses, are the first among the banking big shots to report second-quarter earnings. Therefore, their earnings releases are going to be a significant indicator of the performance of the key banking sector.

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