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Will Wells Fargo (WFC) Surprise this Earnings Season?

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Wells Fargo & Company (WFC - Free Report) is scheduled to report its second-quarter 2014 results before the opening bell tomorrow, Jul 11. Too many questions linger in investors' minds this time around, given the tough industry backdrop and litigation hassles that the bank endured during the quarter.

In the last quarter, this banking giant delivered an 8.25% positive earnings surprise on the back of prudent expense management. This represented the 17th straight quarter of positive earnings surprise.

Will Wells Fargo be able to keep the earnings streak alive after combating the challenges that the industry witnessed during the quarter? Let's see what factors might have influenced the earnings report this time around.

Factors to Influence Q2 Results    

Banks’ efforts to settle lawsuits related to shoddy pre-crisis mortgage practices remained the key trend in the quarter. This was accompanied by dumping unprofitable businesses and concentrating on those with strong potential.

Then again, continued expense control and stable balance sheets should act as tailwinds in the quarter. However, a set of dampeners - dreary consumer and corporate activities, soft trading volumes and sluggish mortgage banking activities - are likely to drag earnings.

Further, uncertainty related to top-line growth looms due to reduced mortgage refinance volume and pressure on net interest margins from the sustained low rate environment. Moreover, litigation costs related to recent settlements might drive down profitability.

Activities of Wells Fargo during the quarter were inadequate to win analysts’ confidence. As a result, the Zacks Consensus Estimate for the quarter remained stable at $1.01 per share over the last 7 days.

Earnings Whispers

Our proven model does not conclusively show that Wells Fargo is likely to beat the Zacks Consensus Estimate in the second quarter. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy) or at least 2 or 3 for this to happen. Unfortunately, this is not the case here as elaborated below.

Zacks ESP:  The Earnings ESP for Wells Fargo is 0.00%. This is because both the Most Accurate estimate and the Zacks Consensus Estimate stand at $1.01.

Zacks Rank: Wells Fargo’s Zacks Rank #3 (Hold), however, increases the predictive power of ESP. However, we also need to have a positive ESP to be confident of an earnings surprise call.

Stocks That Warrant a Look

Here are some stocks you may want to consider, as our model shows that these have the right combination of elements to post an earnings beat this quarter:

The earnings ESP for The PNC Financial Services Group, Inc. (PNC - Free Report) is +0.57% and it carries a Zacks Rank #3 (Hold). The company is scheduled to release its second-quarter results on Jul 16.

Fifth Third Bancorp (FITB - Free Report) has an earnings ESP of +4.44% and carries a Zacks Rank #3 (Hold). It is scheduled to report its second-quarter results on Jul 17.

Capital One Financial Corporation (COF - Free Report) has an earnings ESP of +0.56% and carries a Zacks Rank #2 (Buy). It is expected to report its second-quarter results on Jul 17.

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

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