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We expect Wells Fargo & Company to beat earnings expectations when it reports third-quarter 2013 results before the opening bell on Friday, Oct 11.

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 for Wells Fargo is +1.03% – the difference between the Most Accurate Estimate of 98 cents and the Zacks Consensus Estimate of 97 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 Jul-Sep period with continued support from the Fed, the propensity to invest in the market has increased considerably. While interest income is not expected to show strength, revenues from mortgage fees will support the bottom line.

Though sluggish loan growth will keep interest income under pressure and increased litigations will raise total expenses, lesser credit loss provisions are expected to support bottom-line improvement in the 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 third quarter of the year were inadequate to win analysts’ confidence. As a result, the Zacks Consensus Estimate for the quarter remained stable at 97 cents per share over the last 7 days.

Other Stocks to Consider

Wells Fargo is not the only bank looking optimistic 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:

The earnings ESP for Cullen/Frost Bankers, Inc. is +1.04% and it carries a Zacks Rank #2 (Buy). The company is expected to release its third-quarter results on Oct 24.

Fifth Third Bancorp has an earnings ESP of +4.55% and carries a Zacks Rank #3 (Hold). It is scheduled to report its third-quarter results on Oct 17.

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

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