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Wells Fargo & Company (WFC - Analyst Report) is scheduled to report its second quarter 2012 results before the market opens on July 13. The Zacks Consensus Estimate for the quarter is 81 cents per share, representing estimated year-over-year growth of about 16%.

Wells Fargo has well justified its reputation as a growth stock among the large-cap banks, with cross-selling as its key strength. It has overcome the financial crisis well and as of the first quarter of 2012, has achieved nine consecutive quarters of earnings per share growth.

We expect Wells Fargo to report a decent number this quarter. With solid fundamentals and strategic acquisitions, we anticipate the company to benefit from an economic improvement, though a protracted one, and a somewhat upbeat borrower sentiment.

Also, considering the current economic environment, the recent trends in the credit metrics and the company’s efforts to improve its credit quality, we expect additional reserve releases by Wells Fargo. Moreover, efforts to reduce expenses are impressive and would support bottom-line improvement. Capital ratios are solid and improving as well.

Yet, with the continuation of the low interest rate environment as well as regulatory issues, we think any extraordinary earnings figure would be elusive this quarter. Also, the pace of improvement in credit quality is projected to be slow as portfolio quality approaches a stable, more normal level.

Notably, Wells Fargo passed the Federal Reserve stress test with flying colors in March. The company also enhanced its shareholder wealth by almost doubling its dividend. It is also taking advantage of the deleveraging activities of the European banks and making a host of acquisitions.

Previous Quarter Performance

Wells Fargo’s first quarter 2012 earnings of 75 cents per share were 2 cents ahead of the Zacks Consensus Estimate. Results improved from earnings per share of 73 cents in the prior quarter and 67 cents in the year-ago quarter. First quarter net income applicable to common stock came in at $4.0 billion, up 3% sequentially and 13% year over year.

Wells Fargo’s results were primarily driven by a higher top line. It also reported $400 million (pre-tax) reserve release, attributable to improved portfolio performance. However, an increase in operating expenses was on the downside.

The quarter’s revenue came in at $21.6 billion, which was above the Zacks Consensus Estimate of $20.5 billion. Revenue was also up 5% sequentially and 6% year over year. The sequential improvement in revenue at Wells Fargo was driven by growth in non-interest income while net interest income remained stable. Notably, the company experienced solid mortgage banking and market sensitive revenues in the quarter.

Earnings Estimate Revisions – Overview

Ahead of the earnings release, we notice a somewhat bullish trend in the estimate revisions. The Zacks Consensus Estimates for the second quarter and full year 2012 have been revised upward. However, the magnitude of such revisions suggests that despite being bullish, the trend is not a very robust one.

We will now discuss the details of earnings estimate revisions to substantiate why short-term investors should continue to hold the stock for some time.

Agreement of Estimate Revisions

The estimate revisions confirm that the majority of analysts are apprehending a somewhat stable second quarter for Wells Fargo. Of the 23 estimates, only one increased for the second quarter, while none were in the opposite direction over the last 7 days.

Also, for full-year 2012, there was one upward estimate revision while no downward movement over the last 7 days. However, for full-year 2013, there has neither been any upward nor any downward revision over the last 7 days.

Magnitude of Estimate Revisions

We notice that there has been no change in the magnitude of earnings estimate revisions. The Zacks Consensus Estimate for the second quarter remained flat at 81 cents. Moreover, for both full year 2012 and 2013, the estimates remained unchanged at $3.28 and $3.63 per share, respectively.

Earnings Surprise

Wells Fargo’s performance has been stable over the trailing four quarters with respect to earnings surprises. The average earnings surprise was a positive 1.86%. This implies that the company has beaten the Zacks Consensus Estimate by the same magnitude over the last four quarters.

Our Viewpoint

The estimate revision trend indicates that holding the stock will be a good decision, at least in the short run, given expectations for a stable performance by the stock.

Moreover, we believe that over the long term, investors should not be disappointed with their investments in Wells Fargo given its diverse geographic and business mix which enables it to sustain consistent earnings growth. Going forward, we believe that strategic acquisitions will help expand Wells Fargo’s business and improve its profitability.

In fact, Wells Fargo’s growth plans have historically included a large number of acquisitions, Wachovia being the largest addition in December 2008. Recently, in an effort to boost its subscription finance business, Wells Fargo has agreed to buy WestLB’s $6 billion subscription finance portfolio.

Especially, Wells Fargo is capitalizing on the deleveraging activities of the European banks. Earlier in February, Wells Fargo agreed to acquire the North American energy lending business of BNP Paribas SA (BNPQY) with nearly $9.5 billion of loan commitments and approximately $3.9 billion in loans outstanding. The acquisition was closed in April 2012. Moreover, in 2011, Wells Fargo also made loan portfolio purchases from Bank of Ireland (IRE) and Allied Irish Banks .

We believe that long-term investors, who can absorb the risks related to economy and regulations, can expect a decent growth in Wells Fargo’s earnings in future. Solid capital levels, expense management as well as improved credit quality will also support its profit figures.

Its stress test clearance and subsequent dividend hike as well as plan to increase share buybacks in 2012 also boost investors’ confidence.

Yet, we believe the top-line headwinds would persist, given the protracted economic recovery. Plus, a low interest rate environment would keep its margin under pressure. Wells Fargo’s unrelenting legacy mortgage issues also remain a concern. With the thrust of new banking regulations, there will be pressure on fees and loan growth could remain feeble.

Conclusion

Going by estimate revision trends and the magnitude of revision, there is admittedly an upward pressure, though slight, on the shares over the near term. Wells Fargo shares maintain a Zacks #3 Rank, which translates into a short-term Hold rating.

Also, after reviewing the company’s business model and fundamentals, the recent acquisitions, and the capital deployment efforts, we have a long-term Neutral recommendation on the stock.

Concurrent with Wells Fargo, JPMorgan Chase & Company (JPM - Analyst Report) also kicks off the earnings season for the banking sector by reporting on July 13. Next in line is Citigroup Inc. (C - Analyst Report) which will report on July 16, while Goldman Sachs Group Inc. (GS - Analyst Report) will report on July 17 and Bank of America Corporation (BAC - Analyst Report) on July 18.

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