Q4 Preview: Wells Fargo's (WFC) Low Risk Exposure Could Provide Upside

Shares of Wells Fargo & Co. (NYSE: WFC) are lower Friday afternoon heading into the bank's fourth-quarter report.

Expected out before the market opens Tuesday (the stock market is closed on Monday for MLK Day), the bank should report earnings of 72 cents per share on revenue of $20.08 billion. Wells Fargo reported earnings of 61 cents per share during the same quarter last year.

Shares gained nearly 15 percent in the quarter. Despite the solid year-end move, Wells Fargo finished 2011 down about 9.7 percent. The decline was still largely better than many of its rivals. Shares are actually up 6.5 percent so far in 2012. Over the last 52 weeks, Wells has traded in a range from $22.58 to $34.25.

Investors will be watching trading activity, which slipped to a net loss of $442 million last quarter, as well as Basel III ratios, which were 7.41 percent last quarter. Notably, the capital ratio is unlikely to change much heading into numbers.

Data from Bloomberg shows 26 analysts have a Buy rating on the stock, nine are at Hold, and one is suggesting to Sell. The Street's price target average is $32.50, with a low of $25 and high of $40.

In terms of options, puts are seeing an increase in activity following JPMorgan numbers. Open interest for the 30 call has been holding steady, though a delta of 38 percent points to Wells hanging below $30 for the time being.

Analyst Comments

• JPMorgan is looking for earnings of 72 cents per share. The firm is bullish on Wells Fargo into numbers, rating it an Overweight due to "its strong long-term track record, lower risk profile and solid growth prospects."
  
  JPMorgan highlights key trends for financials in the fourth quarter: "1) non-interest revenues to be impacted by Durbin amendment which took effect in October and continued weak capital markets/trading revenues, partly offset by higher fees in mortgage banking from increased refi activity; 2) net interest income should be up modestly on continued strong deposit inflows and solid C&I loan growth; 3) expenses likely to be seasonally higher; 4) credit quality to improve further, but reserve releases to slow from pace seen earlier in 2011; and 5) higher securities gains.
  
  
• Deutsche Bank sees earnings of 76 cents per share. The firm is looking for a slight uptick in net interest margin and higher earning assets. Deutsche Bank is modeling for a sequential gain of 2 percent in net interest income. Mortgage revenue growth should be about 11 percent from the third quarter.
  
  Deutsche sees pressures on net interest margin being alleviated on "TruPs redemption (4bps), lower long-term debt balances ($9b maturing in the fourth-quarter), solid earning asset growth (we estimate +1 percent sequential un-annualized), help from higher LIBOR rates (helps C&I yields), and mgmt actively deploying some liquidity (we estimate $30b)."
  
  For mortgages, Deutsche sees "higher industry refi volumes in the fourth-quarter and third-quarter's strong production/pipeline should also hit fourth-quarter revenues. The firms also assumes "a 10 percent sequential increase in origination fees in fourth-quarter and higher gain on sale margins."
  
  Finally, credit provisions might rise about 5 percent, given lower reserve release and slightly higher charge offs.

Stay tuned to StreetInsider.com's EPS Insider section to see our analysis of the highly-anticipated quarterly results within seconds of their release. You can also check out Wells Fargo's past performance at Streetinsider's Wells Fargo's Income Statement.

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