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Wells Fargo Investor Payoff Requires Warren Buffett-Like Patience

Tickers in this article: BAC JPM WFC

NEW YORK ( TheStreet) -- Wells Fargo's (WFC) largest shareholder -- Warren Buffett -- has seen his investment in the bank recover to pre-crisis levels on steady gains posted by the nation's top mortgage lender.

Investors should take note of that fact in the wake of the bank's record fourth-quarter profit , which raised some near-term earnings questions.

Generally, today's earnings show why Wells Fargo remains a best-in-class bank that has earned Buffett's long term investing imprimatur. All three of Wells Fargo's businesses, community banking, wholesale banking and wealth management grew profits from quarter-ago and year-ago levels.

Those looking for a short-term trade, however, might have been disappointed. Expect Wells Fargo's fundamental growth to be at the head of the banking sector in 2013, even if near-term headwinds prove a concern to some.

Wells Fargo reported better than expected revenue of $21.9 billion and profitability of $5.1 billion, signaling that the bank's steady share performance remains on track heading into 2013.

Meanwhile, the bank's 20% 2012 earnings per share growth reflected impressive momentum and a strengthening position in the recovering U.S. housing market. Wells Fargo is also increasingly returning capital to investors, boosting buybacks by a total of 48 million shares. An increase of Tier 1 capital to 10.12% of risk assets augurs well for Wells Fargo, as it prepares for Federal Reserve mandated stress tests.

On an earnings call with analysts, Wells Fargo chief financial officer Tim Sloan said the bank submitted a capital plan to the Fed that potentially increases its quarterly dividend.

Still, worse than expected interest-based earnings margins and the prospect a refinancing boom wears off cloud Wells Fargo's short-term share performance in the New Year.

Wells Fargo reported its net interest margin -- the difference between what it earns on loans and what it pays to fund them -- fell a greater than expected 10 basis points. The bank's mortgage pipeline, meanwhile, fell 16% to $81 billion in the quarter, while home loan origination and applications fell from quarter-ago levels, signaling some slowing in the housing market.

On the positive side, core loans grew $47.7 billion and the bank's improving loan quality drove a $250 million reserve release.

Jefferies analyst Ken Usdin wrote in a note to clients that the mortgage banking declines came in less than forecast, while steady loan and deposit growth were strong points to Wells Fargo's earnings.

Marty Mosby, a large-cap banking analyst with Guggenheim Partners, said in an interview prior to earnings that any reported net interest margin decline of less than five basis points and loan growth sequentially from the third quarter would be taken positively by investors.

Wells Fargo impressed on one of those fronts, while a greater than expected NIM decline meant overall interest-earnings for the bank fell $249 million to $10.6 billion.