Wells Fargo Investor Payoff Requires Warren Buffett-Like Patience

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The earnings provide investors crucial insight into trends driving Wells Fargo's profitability and growth given the bank's top footing in the housing market, healthy balance sheet and industry leading dividend payout.

Investors and banking sector analysts are watching interest margins and loan growth as a key proxy for the impact of a third round of Federal Reserve easingannounced in September and insight into the strength of the housing market.

A stabilization of Wells Fargo's interest margins after a 25 basis point drop in the third quarter would have removed the bank's biggest near term earnings risk, freeing investors to focus on positive longer-term trends, according to Mosby.

"The market right now is discounting Wells Fargo's earnings power because they think it is going to be lost because of significant compression of net interest margin," said Mosby.

Investors may need to wait another quarter for interest margins to bottom, and for Wells Fargo's strong fundamental qualities to overshadow short-term headwinds.

Mosby argues that if uncertainties such as interest-earnings and the sustainability of loan demand dissipate, Wells Fargo could outperform the banking sector in 2013, as it has in years past. The analyst notes that while Wells Fargo has doubled earnings since the financial crisis, investors have given it little credit.

Wells Fargo shares currently stand roughly in-line with pre-crisis levels seen in 2007.

"This could be the year where they get a revaluation," said Mosby, who calculates the bank might be able to boost its dividend to the 3% range, far ahead of large cap banking peers such as JPMorgan Chase (JPM) , Bank of America (BAC) and Citigroup(C) .

Bill Smead, chief investment officer of Smead Capital Management , expects Wells Fargo's exposure to a long-term housing pickup to more than offset Fed interest rate policies. "We happen to think a company like Wells Fargo might make more money in the rebound on the value in foreclosed homes than what they will lose on a decline in their interest rate spreads," said Smead, in an interview prior to earnings.

Smead's analysis was borne out in record quarterly earnings.

A $1.6 billion increase in non-interest income, driven by the write up of legacy assets, and flat net interest income on better than expected loan and deposit growth drove overall earnings, even if margins suffered slightly.

"That will wash out in the long run, which is why you want to increase market share," said Smead of Wells Fargo's increasing presence in the mortgage market and in community banking.

Wells Fargo's deposits grew to $928 billion in the fourth quarter, a 7% increase from year-ago levels. Those deposits, however, cut at Wells Fargo's net interest margin by 5 basis points, according to the bank. In a rising rate environment, Smead said he expected the margin pressure to reverse.