The banking sector will kick-off its earnings season on April 13, with Wells Fargo & Co. (NYSE:WFC) and JPMorgan Chase & Co. (NYSE:JPM) reporting their first quarter numbers.
A steady economic improvement is expected to lead to lower credit related costs, which should provide a tailwind for bank earnings in 2012.
Here is a preview of how Wells Fargo, one of the leading banks in the U.S., is expected to fare in the first quarter.
Wells Fargo is expected to report higher earnings on a marginal increase in revenues. Wall Street expects earnings of 73 cents a share, an increase of 9 percent from 67 cents a share last year, according to analysts polled by Thomson Reuters.
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In the past 30 days, 11 analysts have increased their earnings estimate, while one analyst revised it downward.
California-based Wells Fargo has managed to top Street consensus estimates 3 out of the past four quarters, beating estimates by 1.40 to 2.9 percent. Wells Fargo has been growing its profits for three quarters in a row, but its revenues have dropped continuously for the last four quarters.
Meanwhile, 19 Wall Street analysts, on an average, are estimating Wells Fargo to grow its quarterly revenues by 0.7 percent to $20.46 billion. In the year-ago period, the company generated revenue of $20.33 billion.
In addition, many of the Wall Street analysts have a positive stance on the company. Out of 33 analysts covering Wells Fargo, 24 of them rate Wells Fargo as a "buy" or "strong buy"; 8 of them rates "hold," while one analyst has a "sell" rating, according to Thomson Reuters.
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In the fourth quarter of 2011, Wells Fargo earned $3.89 billion, or 73 cents per share, up from $3.23 billion, or 61 cents per share in the year-ago period. However, revenue for the quarter declined 4 percent to $20.61 billion and net interest margin fell 6.5 percent to 3.89 percent.
During the first quarter, investors and analysts spent much of their time researching to predict which regional banks would pass or fail the Federal Reserve's Comprehensive Capital Analysis and Review (CCAR) and estimating the size of dividends and buybacks for those companies that passed these stress tests.
Wells Fargo cleared the stress test and raised its quarterly dividend to 22 cents a share from 12 cents.
On the industry perspective, banks have been working hard to mitigate the lost debit card revenue with the potential upside from these efforts largely excluded from forward expectations.
Also, companies are focused internally on cutting costs, and any traction here would boost investors' confidence.
"We feel investors will be keeping a close eye on lending trends given the strength in 4Q11 and managements' net interest margin guidance for 2H12 and '13 in light of the Federal Reserve's comments early in the first quarter about keeping interest rates low until '14," Oppenheimer analyst Terry McEvoy wrote in a note to clients.
That said, while the yield curve has steepened recently, clearly the industry is operating in a difficult interest rate environment.
Among the notable industry events during the quarter, a federal judge has approved the $25 billion settlement with five top U.S. banks over mortgage foreclosure abuses and fraud and unacceptable nationwide mortgage servicing practices.
Under the settlement, the five banks -- Bank of America Corp. (NYSE:BAC), JPMorgan Chase & Co. (NYSE:JPM), Wells Fargo (NYSE:WFC), Citigroup Inc. (NYSE:C) and Ally Financial Inc. agreed to pay a $25 billion penalty under a joint state-national settlement structure.
With credit recovery as a general theme in the banking industry, investors should focus on banks that have the ability grow their balance sheets through increased loan balances.