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On Friday, Oct. 12, Wells Fargo (WFC) is scheduled to report third-quarter earnings, the results of which will be closely watched in order to gauge consumer health. Specifically, Wall Street expects Wells Fargo to report improved profit thanks to the strength of its mortgage-banking business, as homeowners refinance for lower interest rates. Also, analysts will be watching to see if the bank's commercial lending business is holding up.

It's worth noting that unlike its banking peers JPMorgan Chase (JPM) and Bank of America (BAC), Wells Fargo is less dependent on investment banking or capital markets activity -- which are handled by the Wachovia securities division -- for revenues and profits. It's actually ranked the 10th-largest investment banking fee earner over the past nine months (with JPMorgan Chase being ranked No. 1).

The Numbers Wall Street Expects From Wells Fargo

According to the latest summary of analyst estimates from Yahoo Finance, the Wall Street consensus expects Wells Fargo to report a 9.10% rise in revenues to $21.42 billion, along with an EPS of $0.87 vs. 0.72 for the same period last year. The current consensus EPS estimate of $0.87 is up from the $0.84 consensus estimate three months ago.

For the year, the Wall Street consensus for Wells Fargo calls for a 5.50% revenue increase to $85.38 billion, while EPS is expected to rise from $2.82 to $3.33. For next year, the Wall Street consensus expects flat revenue at $85.42 billion along with an EPS rise from $3.33 to $3.67. Of course, these revenue and earnings estimates for Wells Fargo could make big moves in either direction between now and when the final numbers are reported.

In addition, investors should keep in mind that several other bank stocks are reporting earnings soon. For example, JPMorgan Chase will report earnings on Oct. 12th, Citigroup (C) and Morgan Stanley (MS) will report earnings on Oct. 15, Goldman Sachs (GS) will report earnings on Oct. 16, and both U.S. Bancorp (USB) and Bank of America will report earnings on Oct. 17.

What Wells Fargo Reported Last Earnings Season

The last time Wells Fargo reported earnings they were better than expected. Specifically, Wells Fargo reported a 4% increase in revenues to $21.2 billion, thanks to mortgage originations rising by $2 billion from the first three months of 2012 to $131 billion. Since the first quarter, Wells Fargo's loan book rose by $8.7 billion, its core loan book rose by $13.8 billion, consumer loans increased $375 million, and commercial loans rose by $8.3 billion. However, the last number included $6.9 billion of acquired loans, and after backing out all loans acquired, Wells Fargo still grew its book for the quarter.

During the earnings conference call, CEO John Stumpf noted that the bank had benefited from signs of stabilization in the housing market. He also said that net charge-offs (loans the bank assumes will never be collected) at the firm fell to 1.15% of its total portfolio, or to $2.2 billion. That's actually the lowest level since the financial crisis began in 2007.

What You Need to Listen For

Investors need to look for a continuation of the trends reported in Wells Fargo's second-quarter earnings report. It's worth noting that the bank created one out of every three U.S. mortgages during the first quarter. In fact, in a July Bloomberg interview with Warren Buffett -- whose Berkshire Hathaway (BRK.A) is the largest shareholder in Wells Fargo -- he called the bank's mortgage operation "sensational." Buffett also pointed out that the mortgage market was at the $3 trillion level not that long ago -- meaning if it goes back to that level, the bank will probably have a third of the business.

However, Wells Fargo has already told investors to expect a significant decline in net interest margin (the amount of profit a bank makes from interest on its loans) due to low interest rates. On the other hand, any decline could be similar to what the bank experienced in the third quarter of 2011 when its net interest margin fell from the previous quarter by 17 basis points. Wells Fargo has also apparently been taking steps to soften the blow by reducing the interest rate paid to account holders, along with redeeming certain trust-preferred securities to lower borrowing costs. Likewise, Wells Fargo has shown the ability to increase loans by attracting both new customers and by making loan portfolio acquisitions from other banks or financial institutions.

Analysts have also speculated about Wells Fargo making more multibillion-dollar acquisitions. Its worth noting that the bank has said it's eager to buy other lenders; plus, it has recently made some acquisitions. For example, Wells Fargo recently bought $9.5 billion in loans from French bank BNP Paribas SA and $6.9 billion worth of commercial real estate loans from Germany's WestLB AG. There has also been speculation that CIT Group (CIT) and Discover Financial Services (DFS) would make good acquisition targets.

In the wake of JPMorgan Chase's "London Whale" debacle, its worth noting that Wells Fargo has strong strategic risk management policies in place. Plus, it lacks significant exposure to the European debt crisis. Hence, Wells Fargo is probably going to be the least risky of the major banking stocks for investors.

A Final Word About Earnings

The last time Wells Fargo reported earnings, shares rose 3% and there was a rally on Wall Street for the day. That happened in part because it came out the same day as that of JPMorgan Chase, which turned out to be better than what investors had expected after the London Whale debacle (JPMorgan Chase's shares actually rose 6%). This time around, Wells Fargo could easily move a few points in either direction, depending on how optimistic things look in the commercial lending business and the bank's numbers in general.

Source: Will Wells Fargo's Earnings Report Show Profit?