All eyes on Wells Fargo

The bank has held up much better than its rivals but analysts are growing worried about what impact the purchase of Wachovia will have on earnings.

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By David Ellis, CNNMoney.com staff writer

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Wells Fargo is widely expected to stay profitable yet again when it delivers its fourth-quarter numbers Wednesday.

NEW YORK (CNNMoney.com) -- Nearly all of the nation's largest banks have reported dreary fourth-quarter results, and now investors are wondering if Wells Fargo will do the same.

Unlike many of its peers, the San Francisco-based bank is expected to remain profitable when it reports Wednesday. Analysts are forecasting that the company will report net income of $1.07 billion, or 33 cents a share, according to Thomson Reuters.

But investors are growing increasingly worried about the company's exposure to the devastated California housing market and other consumer-related areas such as credit cards. Shares of Wells Fargo (WFC, Fortune 500) have plunged nearly 50% so far this year.

Some analysts are estimating that loan loss provisions for the company could be somewhere in the neighborhood of $4.4 billion.

"The question this quarter will be what is the follow through on commercial and industrial [loans]," said Chris Mutascio, managing director at Stifel, Nicolaus & Co. in Baltimore. "We have been seeing some pressure as of late. That will be the wild card."

Worried about Wachovia

Wells Fargo's acquisition of Wachovia, which was completed late last year, appears to be troubling analysts and investors the most.

In early October, Wells moved to purchase the ailing Charlotte, N.C.-based bank for approximately $15.1 billion. The bid beat out an earlier government-supported offer by Citigroup (C, Fortune 500) for just Wachovia's banking assets.

When the tie-up was first announced, Howard Atkins, Wells Fargo's chief financial officer, warned that the company would take $74 billion in pre-tax losses and market adjustments on Wachovia's loan portfolio.

Some industry observers have feared that Wells Fargo may have to endure further writedowns on its books as it failed, like many others, to anticipate just how rapidly the U.S. economy would deteriorate since then.

That is what happened with Bank of America (BAC, Fortune 500) when it swallowed up brokerage giant Merrill Lynch.

Earlier this month, Bank of America revealed that it was forced to request an additional $20 billion in government funds to help complete its purchase of Merrill.

Still, as recently as three weeks ago, Wells Fargo CEO John Stumpf expressed confidence in how his firm's purchase was progressing.

"Yes, the economy has gotten more challenging in the last 90 days, but we still like the way we did the analysis," said Stumpf in an interview with the San Francisco Chronicle. "We were very conservative and are excited about putting these companies together."

Hardly untouchable

Even though Wall Street may have growing concerns about the Wachovia deal, many analysts think Wells Fargo remains in much better shape than most other big banks, particularly Bank of America and Citigroup.

Wells, along with rival JPMorgan Chase (JPM, Fortune 500), has fared much better than peers in riding out the credit crunch and turmoil in the housing market.

In the past two quarters, Wells Fargo has not only remained profitable, but also reported better-than-expected results both times.

And while other competitors have tightened lending standards and become increasingly reluctant to extend credit, Wells Fargo has shown signs of expanding, according to Tom Mitchell, an analyst with Miller Tabak.

"Their credit results have actually been pretty good...and they are one of the few banks on a stand-alone basis that was showing lot of growth earlier in the year," he said.

That may help keep the firm safe from Congressional scrutiny as some big banks have come under fire for failing to extend credit after getting infusions of capital from the government. Wells Fargo received $25 billion under the Treasury Department's capital purchase program.

Yet, there is a growing consensus that Wells cannot remain untouchable for long given the scope of the problems affecting the entire sector.

Stumpf has said publicly that he anticipates job losses as a result of the tie-up with Wachovia. At the same time, there has been increasing speculation that the company may have to cut its dividend in order to reduce the capital strain on their balance sheet.

Some company observers suggest that Wells' management could announce a dividend cut or job cuts as soon as Wednesday. To top of page

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