Earnings Preview: Large Mortgage Lender Wells Fargo Getting Big Boost From Housing Recovery

When Wells Fargo and Co. (NYSE: WFC) becomes the second large financial company to report quarterly earnings Friday, Wall Street stock pickers hope a strong report can help start off what is expected to be a dreadful earnings season on an upbeat note.

Bank analysts expect San Francisco-based Wells Fargo -- the nation’s largest mortgage lender -- to report a significant improvement on its results from a year ago, as a spike in revenue from lending activity is seen to offset the decreased profitability each individual loan can provide the financier, given the long-term zero-interest-rate environment.

Analysts surveyed by Reuters expect Wells Fargo to report net income of $4.62 billion, or 87 cents a share, on revenue of $21.47 billion. That would be a jump of 21.5 percent on profit and 9.4 percent on revenue compared with the languid results a year ago in the same period.

"A better housing market would help banks on the revenue and expense side of the equation, translating into fewer charge-offs, lower credit expenses (and) better revenue as residential loan growth picks up," analysts at Goldman Sachs said this week in a note that referred to Wells Fargo and several other banks as likely to show big bottom-line improvements even on modest upticks in this area of the economy.

Economic policy makers will look at Wells Fargo’s results to gauge the level of recovery in the housing market. Optimism is high: Wells Fargo shares traded in a range close to four-year highs Thursday, despite having taken a hit earlier this week after a federal lawsuit against the bank was announced.

That's just one of the pitfalls. There’s a risk the bank will have to note one-time charge-offs relating to legal issues.

On Tuesday, the U.S. attorney in New York filed a lawsuit against the bank for “reckless” activities in its mortgage-securitization unit that led to big losses in government-insured loan books. That follows a July settlement, for $175 million, over allegations of discrimination in lending.

In early September, CFO Timothy Sloan told investors the bank's profit margin from lending and investing could fall 17 basis points in the third quarter, as the compression in loan profitability within a low interest-rate environment became more evident.

Still, the expectation is that higher revenues will carry the day. Analysts at Credit Suisse, who have a "Neutral" rating on Wells Fargo but recently gave a positive nod to the bank stock, say Wells Fargo is one of the issues they expect will "surprise on the upside."

Shares of Wells Fargo and Co. rose 15 cents to $35.38 in early trading. They've gained nearly 30 percent in 2012.