Wells Fargo Results Friday Seen as Litmus Test for Housing Recovery, Responsible Banking

San Francisco-based Wells Fargo & Company (NYSE:WFC), the nation's most prominent mortgage lender, is expected to report a significant surge in revenue and profits when it reports second-quarter financial results Friday morning, boosted mainly, as has been the case in the past, by a rise in mortgage servicing fees.

Analysts surveyed by Thomson Reuters expect Wells Fargo to report profit of $4.3 billion, or 81 cents per share, on revenues of $21.3 billion. That would be a significant boost -- of 15.5 percent in profits and 4.6 percent in revenues -- from year-ago quarterly results.

Mortgages make up over one-tenth of Wells Fargo's revenues, a sharp contrast with its large bank peers, which are more heavily dependent on capital markets activity.The last time Wells Fargo reported profits, in April, a 13 percent surge in mortgage banking provided a large boost to earnings. But the housing market, as well as the general U.S. economy, has shown signs of softening since then.

Analysts are looking at Wells' corporate filing to be a counterpoint to those recent bearish assessments. Marty Mosby, an analyst at Guggenheim Securities, is among those who see a bright quarter for Wells Fargo.

We originally thought that WFC would have more growth via efficiency improvements and less revenue growth. As mortgage banking fees have increased, we have adjusted the composition of growth (from those fees), which has raised our revenue growth to be consistent with our other Large Cap Banks and lessened the dependence on efficiency improvements, Mosby wrote in a June 30 note.

Less Risk Than Our Peers

Assuming the results from mortgage banking are as good as optimists expect, the comparison to other Large Cap Banks will be the major theme of Wells Fargo's earnings conference following its quarterly results, given the bank is trying to distance itself from what it states are the riskier business models of its peers.

You can't take outsized risk in the financial services industry, Chief Financial Officer Timothy Sloan told audience members at a May 22 Investor Day meeting, for example, reportedly underscoring the bank's image as more straightforward than its competitors by addressing the crowd without a teleprompter, and while wearing shirtsleeves.

We have less risk than our peers, Sloan said.

So far, the bank has been mostly unable to truly pull away from its peers in the all-important fixed-income market, where its bonds have been battered alongside those of rivals like JPMorgan Chase and Co. (NYSE:JPM) recently.

But a prime showing in a quarter where investment bank Keefe Bruyette & Woods expects revenues to fall by 20 percent across universal banks could change that.

Strongest, Most Respected

Some analysts are predicting just such an outcome.

Wells is one of the strongest, most respected U.S. banks, which has led it to be a core portfolio holding for investors, Jefferies analyst Ken Usdin wrote on a research note Monday, initiating coverage of the bank. The company enjoys a benevolent combination of offensive (dividend growth/buybacks, market share gains, portfolio acquisitions) and defensive (less exposure to headline/revenue risks vs. bigger bank peers, cost control program) characteristics.

Of course, such enthusiasm begs the question of where exactly Wells' upside will come from. Besides mortgage banking, a suggestion of how the bank will seek to achieve growth goals came in a late May Bloomberg interview with Mike Niedermeyer, the head of the bank's institutional asset management division, where the executive claimed the bank aims to double its $444 billion asset-management unit within the decade by expanding into oversold European markets.

There had also been suggestions that the bank will pursue acquisitions, which the bank already made good on with a June 25 announcement that it acquire the U.S. operation of German bank WestLB.

For Wells, then, July 13 could truly be a make-or-break day.