Banks rally but not out of the woods yet

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Banks' earnings preview

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NEW YORK (CNNMoney.com) -- A strong earnings report from regional bank Wells Fargo Wednesday sent bank stocks skyrocketing. But analysts said it may wind up being the exception and not the rule as more banks prepare to report big losses.

Better-than-expected earnings from the San Francisco-based bank provided a much needed lift to battered financial stocks on Wednesday. Wells Fargo's stock surged more than 30% Wednesday, helping to lift the S&P Banking Index by more than 20%

Still, one analyst said it may be a mistake to read too much into Wells Fargo's results.

"I would not be quick to suggest that so goes the rest of the financials," said Jackie Reeves, a former banking analyst who now serves as a managing director at Bell Rock Capital LLC.

Although Wells Fargo (WFC, Fortune 500) reported that profits fell 22%, earnings came in at 53 cents per share, ahead of analysts' estimates of 50 cents a share.

The bank also announced plans to raise its quarterly dividend by 10%. This comes at a time when many other large banks have been cutting their dividends as part of an effort to conserve capital.

Peter Goldman, managing director of Chicago Asset Management, which oversees roughly $500 million including shares of Wells Fargo, said that it's unlikely that many other big banks will be able to follow Wells Fargo with their own earnings surprises.

Unlike many of its peers, he noted, Wells Fargo exercised plenty of caution in recent years when the country's housing market was booming, most notably in its own home state of California.

"I consider them to be top quality in the group," said Goldman. "They're the best managed out there."

In fact, the company said it is even taking advantage of the turmoil affecting other West Coast rivals, such as mortgage lender Countrywide Financial, which has since been acquired by Bank of America (BAC, Fortune 500), and Washington Mutual (WM, Fortune 500).

Wells Fargo said Wednesday it built its deposit base and lent to more customers during the quarter. "We are open for business and getting lots of it," said Wells Fargo CEO John Stumpf.

Still, not all of the news from Wells Fargo was encouraging. The company had to take $3 billion in provisions for credit losses, half of which was earmarked for future loan losses.

So far, just a handful of banking institutions have revealed their second-quarter results. And most have been rather dreary.

Both U.S. Bancorp (USB, Fortune 500) and the Buffalo, NY-based M&T Bank (MTB) reported bigger-than-expected declines in earnings earlier this week after setting aside more money to safeguard against bad loans.

JPMorgan Chase (JPM, Fortune 500) is expected to report on Thursday morning that its earnings per share fell more than 60% in the second quarter.

What's more, analysts are betting that the nation's largest broker Merrill Lynch (MER, Fortune 500) will post a $1.8 billion loss Thursday afternoon. Citigroup (C, Fortune 500) is expected to follow that up on Friday morning by spilling more than $2.8 billion in red ink.

Both large and small financial institutions that bet big on the mortgage industry continue to be plagued by ongoing deterioration in the housing market and are now facing problems across their consumer loan portfolios such as credit cards and autos as they economy continues to weaken.

That could mean that the big one day gains for other banks stocks Wednesday -- Citi soared 13% while WaMu gained 25% for example -- could be short-lived.

In fact, Scott Siefers, managing director at Sandler O'Neill & Partners, wrote in a research note Wednesday, that even Wells Fargo could face more investor doubts ahead "as the market grapples with the sustainability of this quarter's better-than-expected results and continued credit uncertainty."