Wells Fargo & Co said it expects to post a $3 billion first-quarter profit, sending its shares soaring, lifting a wide range of stocks, and providing a welcome jolt to the troubled banking sector.

In morning trading, shares of the fourth-largest U.S. bank were up $3.90, or 26.2 percent, at $18.79. The KBW Bank Index jumped 10.5 percent, and the Standard & Poor's 500 gained 2.8 percent.

Wells Fargo's preliminary results, announced 13 days early, provide evidence that lenders engaged in traditional banking activities may handle the recession better than many analysts and investors expect.

The San Francisco-based bank is also one of the biggest U.S. mortgage lenders, and three months ago bought its struggling larger rival Wachovia Corp for $12.5 billion. It said Wachovia has performed better than expected.

In this terrible environment, to exceed on the upside is going to raise the bar pretty high, said Matt McCormick, a banking analyst at Bahl & Gaynor Investment Counsel in Cincinnati.

Quarterly profit after preferred stock dividends -- including payouts on shares issued to the U.S. government in exchange for $25 billion of taxpayer bailout money -- was $2.3 billion to $2.4 billion, or 55 cents per share, the bank said.

Analysts on average expected profit of 25 cents per share, according to Reuters Estimates, which revised the consensus estimate from 26 cents after a late change.

The main story is that traditional banking businesses, and the mortgage banking businesses, were very solid, Wells Fargo Chief Financial Officer Howard Atkins said in an interview.

He said it was purely Wells' decision to release the first-quarter figures early, saying that given the importance of the Wachovia acquisition, we felt it was important to get information into the market as quickly as possible. The bank is due to report full first-quarter results on April 22.

Among larger lenders, shares of Bank of America Corp rose 18.8 percent, JPMorgan Chase & Co jumped 12.7 percent, and Citigroup Inc added 8.9 percent.

LITTLE IMPACT FROM FASB

Atkins said there was very little impact on results from a new rule by the Financial Accounting Standards Board that gives banks more freedom to value assets as they would in normal markets rather than at distressed prices.

He also said Wells Fargo would like to repay the bailout funds received under the Troubled Asset Relief Program as soon as practical.

The government will decide ultimately when that can be done. The main point is that our objective is to earn profit, as we did in the first quarter so successfully, he said.

Wells Fargo said it made more than $100 billion of mortgage loans in the quarter, and has an application backlog of $100 billion. The bank said it makes one in seven U.S. mortgages.

It expects net chargeoffs of $3.3 billion in the quarter, down from about $6.1 billion in the fourth quarter for Wells Fargo and Wachovia combined, and will add $1.3 billion to loss reserves.

They are probably one of the best positioned to expand and benefit from the particularly low mortgage rate environment, said Michael Farr, president of Farr, Miller & Washington in Washington. I don't think that this is an all-clear for Wells Fargo. They have got a huge portfolio of home equity loans.

Wells Fargo slashed its dividend 85 percent in March, which it said would save $5 billion a year. It is also planning $5 billion of cost cuts tied to the Wachovia acquisition, as well as an additional $2 billion of further cost cuts.

Atkins said details on Wachovia savings are going to begin to emerge in the second quarter. He declined to comment on the U.S. Treasury Department stress tests of 19 large lenders.

Some banks may have sizable capital needs, a person familiar with the tests said on Thursday. The source spoke anonymously because the tests are ongoing.

(Reporting by Elinor Comlay and Jonathan Stempel; additional reporting by Karey Wutkowski in Washington; editing by John Wallace)

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